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May 7, 2015

Adam Smith’s Criticism of Government: Knowledge

Adam Smith argued that politicians and bureaucrats lack both the information required to make good decisions and the incentives to become better informed.

Despite revisionist attempts to water down his support for liberty, Adam Smith boldly criticized politicians, bureaucrats, and special interests. He repeatedly points out their narrow-mindedness, their ignorance, their corruption, their hubris, and their destructiveness—especially towards the poor. In fact, many of the most memorable and quoted passages from Smith’s work address the importance of liberty and the problems with government intervention. His criticisms are so extensive that I have devoted three posts to developing them.

Government should be limited because its officials are unfit to plan other people’s lives. They lack the good incentives and depth of knowledge that private citizens have. Smith claimed that people have a strong interest in caring for themselves and their families, and that businessmen have a strong interest in stewarding their resources well, while government officials do not. Politics, particularly at the national level, is plagued by its lack of natural sympathy for the wellbeing of its citizens, by its “affected interest” in their affairs, by the influence of lobbyists and other special interests, and by the prevalence of unintended distortions created by its policies. Smith realized that local governments generally have greater accountability than national governments do.

Smith had a rich conception of knowledge—much richer than the “information economics” of George Stigler or Joseph Stiglitz. Knowledge involves not just data, but interpretation. People frequently draw different conclusions from the same data. Even if government officials somehow did have the same interest and incentives as individuals or businessmen, they could still not contribute to the flourishing of society as well because they lack the knowledge of how to do so. Nor is the creation and acquisition of knowledge costless. People need incentives to generate and update their knowledge. As Smith notes:

The interest of the corn merchant makes him study to [ration corn] as exactly as he can; and as no other person can have either the same interest, or the same knowledge, or the same abilities to do it so exactly as he, this most important operation of commerce ought to be trusted entirely to him; or, in other words, the corn trade, so far at least as concerns the supply of the home-market, ought to be left perfectly free.

We find in Smith a cogent criticism of central government planning centuries before it was tried in the Soviet Union or China. Bureaucrats cannot ration corn in a famine better than the corn-merchant can because they do not have as much knowledge, ability, or interest in rationing corn as the corn merchant does.

Smith realized that a great deal of important knowledge is dispersed among individuals. The individual businessman has the best incentive to use his resources well because he is the one who stands to gain or lose from his decisions. Deciding how the production of his capital

is likely to be of the greatest value, every individual it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

Individuals are in a far better position to decide what to make and sell than political officials because they have local and personal knowledge of their industry. They also have a strong incentive to make good decisions because it affects their wellbeing. Furthermore, businessmen receive direct feedback from the market about whether they have successfully used their resources to generate goods and services that people demand. Government officials, on the other hand, are insulated from the market feedback that is essential for updating and correcting one’s ideas and activities.

Government officials vary from politicians running for office to low-level bureaucrats routinely carrying out the activities of their bureau. The term also includes staffers, contractors, regulators, judges, and political appointees. These officials have access to less useful information about how to improve people’s lives than those individuals do. Nor do the officials all have the same level of insulation from market feedback. A midlevel bureaucrat in the EPA for example, is in a very different position from the local school board member with respect to how much pressure she feels from those affected by her decisions. Government officials also have varying incentives to get good knowledge. With more incentives, better knowledge, and less insulation, we have better government.

There are several reasons why government officials generally have worse knowledge than private individuals. They often have less sympathy with those affected by their decisions because they rarely interact with them. Consider the difference between the interests of private employers and of government bureaucrats in hiring decisions. Smith argues that the “affected anxiety of the law-giver lest [employers] should employ an improper person, is evidently as impertinent as it is oppressive.” Employers are in the best position to determine who they should hire. Food stamps and educational standards affect millions of people—people who are largely unknown to the bureaucrat or politician. Even more problematic is that government officials fail to see the lost opportunities and unseen possibilities eliminated by their policies. Although bailing out General Motors kept many people employed, it meant that their equipment was not liquidated and that new arrangements, both of capital and workers, did not occur.

Another problem is that these government officials often face a set of incentives that have almost no direct link to the public good. The low-level staffer or bureaucrat writing the No Child Left Behind policies does not receive feedback from the thousands of schools that must fire competent teachers because they do not have the right credentials. Instead, these bureaucrats are trying to increase the budget, scope, or authority of their agency or improve their future employment prospects. They also face an army of lobbyists who tell very one-sided stories.

Smith argues that the motive to improve one’s own condition is so strong “that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations.” Hence the simple system of natural liberty should be the default position in a free and flourishing society.

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