Academic journal article Independent Review

Adam Smith's Roles for Government and Contemporary U.S. Government Roles: Is the Welfare State Crowding out Government's Basic Functions?

Academic journal article Independent Review

Adam Smith's Roles for Government and Contemporary U.S. Government Roles: Is the Welfare State Crowding out Government's Basic Functions?

Article excerpt

Government's role in economy and society is constantly debated. Views range from that of anarchists, who believe in no government, to that of totalitarian socialists, who believe in complete state control of economy and society. Most people adopt a view somewhere between these extremes, yet even moderate views may differ vastly.

For more than half of U.S. history, government's role in the United States and other developed countries was relatively minor. Taxes and expenditures as a percentage of aggregate economic output were small, and regulations were few. (1) This role began to change significantly in the late nineteenth century, as Germany instituted the first elements of the welfare state. Since that time, even countries that avoided the extremes of fascism and socialism have adopted a more expansive role for government. In developed Western democracies, governments have advanced the welfare state through a host of programs, such as public education, government-provided or -funded health care, and old-age pensions. Government taxing and spending as a percentage of aggregate output have risen, and regulations of the private economy are now numerous and complex. (2)

In this article, we do not take a position on what the state's role should be. Our aim is simpler and more objective. We first examine the roles Adam Smith advocated in his classic book An Inquiry into the Nature and Causes of the Wealth of Nations ([1776] 1976). Smith believed that government's proper roles in society should be limited, but well defined: government should provide national defense, the administration of justice, and public goods. In other words, it should protect citizens from external and internal aggression and supply goods that the free market may not provide.

After carefully considering Smith's writings in this essay, we compare the contemporary roles played by the U.S. government to the roles Smith envisioned. Examining government expenditures over time, we find that carrying out the roles Smith advocated has come to account for an increasingly smaller share of total government spending and that expanding the social-welfare state in the form of transfer payments has taken up an increasingly larger share of total government spending. This trend is evident at national, state, and local levels of government.

We turn next to a consideration of the consequences of an ever-expanding welfare state, which may not be limited to the creation of "big government" or the crowding out of private investment. If the roles that Smith advocated are essential to the maintenance of a safe and prosperous society, then escalating expenditures for transfers may ultimately threaten the government's capacity to provide the services that Smith deemed truly beneficial.

Ideas and Theories about Government's Role in Society

We begin with anarchy. Although the theory of anarchy appeals to staunch individualists, its possibility is a "conceptual mirage," in the words of James M. Buchanan (1975, 3). Because individuals may not abide by ethical rules, these rules may be insufficient to provide order, without which society deteriorates into chaos and lawlessness. Mancur Olson makes an economic argument against anarchy, saying that it yields "little production" (2000, 7). Without the state to enforce property rights, the losses from theft, from the use of resources for the prevention of theft, and from the organization of production so as to avert theft make anarchy impoverishing and infeasible.

To preclude the losses stemming from anarchy, people form governments. Buchanan argues that people willingly forgo some of their liberties to form a social contract that establishes formal order through coercive means. (3) Thus, the "protective state" is born. With order established, productivity rises, and investments aimed at the prevention of theft fall.

Randall Holcombe (2004) takes a different approach to government's origins. …

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