Adam Smith's Analysis of Bounties as an Early Example of the Concept of Noneconomic Objectives

By Elmslie, Bruce | The American Journal of Economics and Sociology, October 2004 | Go to article overview

Adam Smith's Analysis of Bounties as an Early Example of the Concept of Noneconomic Objectives


Elmslie, Bruce, The American Journal of Economics and Sociology


I

Introduction

IT SEEMS THAT economists have finally forgiven Adam Smith for not being David Ricardo. From Ricardo through Jacob Viner, most economic theorists have considered "Smith's contribution to the theory of international trade [to be] slight at best and erroneous at worst" (Maneschi 1998, p, 48) The main reason for this lowly opinion was Smith's failure to discover the theory of comparative advantage. This failure seems all the more glaring given that David Hume left Smith with all of the analytical tools necessary to develop such a theory: all Smith had to do was put the pieces together.

This perception of Smith's contribution to trade theory began to turn with Myint's (1958) recognition that Smith's theories of trade were intimately connected with his overall theory of economic development. Today, it is generally recognized that Smith's emphasis on increasing returns and dynamic gains provides an analysis of trade and the gains from trade that is rich with insight (Blecker 1997) and internally consistent with Smith's overall system of natural liberty (Elmslie and Sedgley 2002). (1)

While Smith's theories of trade have enjoyed a renaissance, his work on trade policy has "largely been ignored. This paper is interested in Smith's critiques of bounties (read "subsidies") on exports. I argue that Smith's analysis of bounties foreshadows the basic trade policy framework of distortions and noneconomic objectives that, since Bhagwati (1971), has formed the basis of neoclassical policy analysis. While Smith does not develop a coherent theory of distortions, he captures the logic of the theory of noneconomic objectives and attempts to rank policy alternatives based upon their relative social costs. Moreover, Say extended Smith's analysis of the effects of bounties to develop policy based on endogenous distortions.

II

Smith and the Theory of Noneconomic Objectives (2)

NEOCLASSICAL THEORETICAL POLICY analysis is based upon a foundation of complete transparency. The policy prescriptions for the elimination of distortions and the most efficient manner to meet noneconomic objectives are the foundation of this analysis. The theory shows that if a distortion exists the first-best option is to eliminate the distortion directly rather than to erect a countervailing distortion in the system. The analysis of noneconomic objectives develops as a corollary to that of distortions: if a noneconomic objective exists, it is best to meet the objective as efficiently as possible by directing the policy measure (tax cum subsidy) specifically at the objective. (3) Given that the government policy is not directed at the elimination of a market-created distortion, intervention will create a distortion in the system. The idea here is to create as few distortions as possible while still meeting the objective. (4)

A noneconomic objective of a government can be represented by a minimum output objective for an industry. The objective could be met, for example, by a subsidy on exports. However, such a policy will create other distortions elsewhere in the economy. If one industry is given a subsidy on exports, two external effects are created. First, the home price of the good will increase. This essentially makes home consumers pay for the subsidy twice. Not only must they finance the subsidy, but they are also taxed indirectly in the form of higher prices for the good in the home market. Moreover, a subsidy on exports of one industry taxes other industries through a Lerner effect. The expansion of the exports of one industry will either reduce the exports of other industries or increase imports that compete with domestic producers.

A preferred solution is a direct production subsidy. A production objective is best met by a production subsidy. A policy directed at the objective creates fewer distortions in the system. The disincentive to other industries is lessened, while consumers pay the tax only once. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Adam Smith's Analysis of Bounties as an Early Example of the Concept of Noneconomic Objectives
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.