Why Adam Smith isn’t anti-regulation

April 4, 2008

I’m not insane enough to read Adam Smith’s Wealth of Nations, but I have been working my way through P. J. O’Rourke’s commentary on the book. And regulation of business comes up pretty often.

Adam Smith was generally against regulation under the theory that it actually prevents competition and inflates prices. And he’s right about that — meeting regulatory standards can be an enormous barrier to entry, especially if the regulations are written to that purpose.

There are two important caveats. First, Adam Smith was as suspicious of consumer regulation as he was corporate regulation. Government, he said, should provide “tolerable security” in the marketplace — not absolute security. Protecting everyone’s profits is not government’s job. The modern End User Licensing Agreement (EULA) would made Smith wince; the idea that people critical of companies could be subject to slander, libel, or trademark-infringement suits would have horrified him. Smith was acutely aware that companies would cry “deregulation” when it suited them and “protect us” when they could profit by law. Government is supposed to be hard-nosed about both.

Secondly, Smith was a pragmatist about regulation — regulation is appropriate under certain specialized circumstances:

But those exertions of the natural liberty of a few individuals, which might endanger the security of a whole society, are, and ought to be, restrained by the laws of all governments.

In other words, if you’re able to take away the security of other people then you’re too powerful and you need to be restrained. Smith is apparently thinking specifically about banks, here, but in a modern society it’s easy to imagine how a few people (or companies) exercising their “freedom” can cause a great deal of damage without hardly even trying.

The question then becomes: how much of a threat is a threat? Is a threat to liberty sufficient or do all of us have to be afraid for our very lives? Should we, for example, have no air safety standards because the only ones in immediate danger are the minority of people in the air?

Posted in Basics of Liberalism