Tuesday, July 3, 2012

They don't own Adam Smith

One of the unfortunate things that you sometimes see is non-libertarians essentially ceding Adam Smith to the libertarians. I'm not sure why. I guess that's just what they were taught for so long they started to believe it. Not all of them do. Gavin Kennedy is great on this count, as is a professor of mine at American University, Robert Blecker.

But with some libertarian claimants to Smithian economics, the argument is not that hard to make. Take this recent post by David Friedman:

"I just came across a blog which contained the following:
The rich should contribute to the public expense, not only in proportion to their revenue, but something more than that proportion.
Adam Smith, Wealth of Nations
 
 The actual quote is:
It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."
 
Now if you stopped reading Friedman's post there you would have thought he was harping on some strange technicality that he started quoting part-way through the sentence, but that what we've still got is fairly obvious evidence the Smith was sympathetic to progressive taxation. But that's not Friedman's view at all:
 
"Not only has the blogger removed without notice the first seven words of the sentence,  sharply changing its meaning, he has capitalized the word that starts his truncated sentence, thus pretending that what he is giving is the whole sentence."
 
Huh?!? This sort of thing makes guys like Gavin Kennedy's job easy.
 
I'll agree, Friedman is right on a technicality. It's not clear why the blogger lopped off the start of the sentence. I googled it and I've seen it sometimes with the beginning and sometimes not, so he seems to have just copied it from somewhere. Not a big deal in my view, but OK - Friedman is right.
 
The point is, though, the meaning of the sentence is still there (unless I'm missing something, but I think I can manage Smith's doublt negative)!
 
This discussion is in the context of "house-rents". In addition for his explanation of how a house rent tax is naturally more progressive, Smith also approves of these taxes because they should be relatively easy to assess. He seems to somewhat prefer ground rent taxes to house rent taxes, although he admits they haven't been tried. I have to say I'm having trouble parsing why he prefers the ground rent tax. He's quite clearly positively disposed towards the inherent progressivity of the house-rent tax, though.

28 comments:

  1. I am not even sure what Adam Smith would have to do with libertarianism in the first place. It's like trying to connect Aquinas to football merely because a lot of footballers tend to be Christians.

    ReplyDelete
    Replies
    1. "I am not even sure what Adam Smith would have to do with libertarianism in the first place."

      The fact that he was in favor of a much smaller government and more nearly laissez-faire system than currently exists. His views were not as extreme as those of, say, the current Libertarian Party, but in the same direction.

      I'm curious, reading blog posts and comments such as these, as to whether their authors have actually read through The Wealth of Nations or are merely working off selective quotes provided by other people. It is hard to see how one could read the whole discussion of taxation and miss the first maxim, which is what starts it.

      Are any of you willing claim that you have read through the whole book? All of the section relevant to the opinions you are offering here?

      Delete
    2. No one is missing the first maxim, David. I hope you're not one of those people who thinks that because there is someone out there who has the audacity to disagree with you they have "missed" something.

      Delete
    3. I take that back... perhaps some people are.

      But generally speaking that's not the problem, and you're attitude here is really obnoxious. Is Gavin Kennedy just some hack that hasn't done his homework too?

      Delete
    4. David, I've read the Wealth of Nations, more than once, actually. Granted it has been about 7-8 years (I don't remember being terribly impressed). Libertarianism is a political philosophy, thus the economic discussion of taxation as laid out by Smith isn't necessarily relevant, IMO. Also, if you take the Rothbardian approach to libertarianism, as I do, then the entire Smithian taxation discussion is certainly irrelevant to libertarianism.

      If you're talking in relative terms, then I will grant you that Smith is more liberty-minded than some of his predecessors, but I wouldn't call it necessarily libertarian. We might as well call your father a progressive (which is obviously absurd).

      Delete
    5. BTW, before you respond you should be aware that I do not consider myself an intellectual, nor am I an academic. In fact, I have been quite honest in my self-assessments and have admitted that I am not a very smart person. Basically, if you want to engage in debate with an idiot, that's your choice to make.

      Delete
    6. "I hope you're not one of those people who thinks that because there is someone out there who has the audacity to disagree with you they have "missed" something."

      Do you prefer to argue with people who think anyone who has the audacity to disagree with them is dishonest? If I understand Aumann's agreement theorem (and maybe I don't), if you had all the same information as Friedman then you would come to the same conclusion as him unless one of you were not seeking the truth. In other words, if you disagree, it's because one of you missed something. So rather than being bad form in an argument, assuming you're opponent missed something should be the norm.

      Delete
  2. There is a large difference between saying that the fact a tax falls more heavily on the rich isn't a strong reason to reject it, which is what Smith is saying in the actual quote, and saying that it's desirable, which is what the truncated quote pretends he is saying. The tax he is discussing is one that he considers desirable on other grounds.

    Smith's first maxim of taxation is:

    "I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state."

    That makes it clear that he regards taxing the rich more heavily as undesirable, even if sometimes tolerable.

    ReplyDelete
    Replies
    1. I need to reread this whole book again, but this does not seem like very strong ground that you're on David. Yes, taxes should be distributed to approximate the income distribution. Does anyone deny this? Not that I know of. Given the history in England of head taxes and hearth taxes it's not clear to me at all that you can cut and paste the first maxim into modern conceptions of a flat tax the way you're trying to. This is particularly problematic given accompanying evidence of how reasonable he thinks taxing the rich at a higher rate is.

      Anyway, it would probably be great for me to sit down and reread all of book V, but I'm not very convinced by this line of argument. It seems to be assuming its own conclusions in a lot of ways: assume he supports a flat tax ergo he can't possibly support a progressive tax despite pretty clear evidence that he is saying he supports it. When you find yourself in that situation, maybe the problem lies in your premise, David.

      Delete
    2. Smith doesn't support an income tax at all, flat or otherwise--the one possible exception he mentions is a tax on the income of government employees. What he supports is a tax system whose incidence is proportional to income. He is entirely explicit about that.

      And saying "It is not very unreasonable to do X" is not a statement of support for doing X, it's a qualification of his opposition to doing X.

      "Yes, taxes should be distributed to approximate the income distribution. Does anyone deny this?"

      Currently, almost everyone denies this. Most people think that the rich should pay a larger share of their income as taxes than the poor--and, so far as the federal income tax is concerned, they do. That's directly inconsistent with the first maxim, which says contribution in proportion to income.

      Delete
    3. You say that Smith's meaning is "clear", but I find that it is often ambiguous and open to interpretation. The construction "it is not very unreasonable to do X" could mean, as you say, "a qualification of his opposition to doing X." It could also be an endorsement of doing X, worded so as to be more palatable to skeptical readers. The spectrum of things that are "not very unreasonable" stretches all the way from "rather unreasonable" to "totally reasonable."

      The wording of Smith's first maxim is also ambiguous. You put special stress on "in proportion to the revenue". But one could equally well put stress on the whole phrase: "in proportion to the revenue which they respectively enjoy under the protection of the state". Given that (as the old saying has it) "property is 90 percent of the law", and that most of what the state does/did (especially in Smith's day) was to enforce contracts and protect property titles, it is not unreasonable to view the rich as enjoying a greater proportion of revenue under the protection of the state than do the poor. Since Smith then goes on to endorse a land tax that will fall exclusively on wealthy, idle property owners, the whole appeal of which is that it cannot be pushed onto their tenants, employees, or customers, I think this interpretation the more plausible of the two.

      Smith had aims in his writing: to convince skeptical mercantilists to change their approach to trade and competition; to clean up the Physiocrats' theories and make them respectable; to fend off Mandeville's "greed is good" argument and preserve a role for morality and self-restraint. It is thus a bit anachronistic to try to draft him in the service of either the modern right or left.

      Delete
    4. Well said Will. I don't think David is making a very convincing case here.

      Delete
    5. "Since Smith then goes on to endorse a land tax that will fall exclusively on wealthy, idle property owners, the whole appeal of which is that it cannot be pushed onto their tenants, employees, or customers, I think this interpretation the more plausible of the two."

      Could you point to where he argues that that is the advantage of a land tax? The passage we have been discussing, which is about a tax on the ground rent of houses, makes no such argument. He goes on to discuss a tax on the rent of land, but the argument isn't what you assert, it is that "Both ground-rents and the ordinary rent of land are a species of
      revenue which the owner, in many cases, enjoys without any care or attention of his own. Though a part of this revenue should be taken from him in order to defray the expenses of the state, no discouragement will thereby be given to any sort of industry." It isn't, in modern terminology, an argument about distribution at all but about allocation--no dead weight burden.

      Smith does, however, endorse a tax on the luxuries of the poor, the whole appeal of which is that it cannot be pushed onto the (not poor) purchasers of their labor--which he argues would happen if it were a tax on the necessaries of the poor. Do you conclude from that that he favored a regressive tax?

      Delete
    6. He points out the tax incidence argument for a land tax here, a bit later:

      "As it has no tendency to diminish the quantity, it can have none to raise the price of that produce. It does not obstruct the industry of the people. It subjects the landlord to no other inconveniency besides the unavoidable one of paying the tax."

      He then writes that revenue from land taxation has been falling for some time, in what I take to be a tone of disapproval, though that (too) is an interpretive question.

      As to the luxury tax: that is also clearly about allocation, not distribution. Smith wants the tax code to encourage capital formation, to maximize the amount of productive labor and minimize the amount of unproductive labor. This is how he believes the nation can enjoy the most rapid growth. Hence he has no problem with the state using the tax code to "pick winners and losers." It is not clear to me either that he views this tax as falling primarily on the poor, since in Book 2 he describes the consumption of foreign wines, silks, and so on by "idle people who produce nothing" as "hurtful to society." (Page 181 in my copy).

      It is relevant, I think, that support for a land tax was common to classical liberals at least from John Locke. This was coupled with skepticism about the political power and economic value of the landed class. Smith is fairly equinanimous, but he seems broadly sympathetic to this tradition, given the famous quotation on landlords loving to reap where they never sowed, and his liberal use of the word "monopoly" when describing land ownership.

      Delete
  3. Presumably Smith prefers land taxes to house taxes because land taxes do not discourage production, as the supply of land is fixed.

    ReplyDelete
  4. I feel the same way about Smith. The Wealth of Nations also contains great arguments in favor of financial regulations, public education, and public works. Certain of the passages suggest that Smith would take a positive view of unions. My best understanding is that his current reputation is due to the selective rhetorical use of his work by the Chicago school and especially Milton Friedman.

    This surprised me:

    "I have to say I'm having trouble parsing why he prefers the ground rent tax."

    The idea is that the value of land has almost nothing to do with the owner's exertions, while the value of housing capital is the result of conscious effort. Land value is socially created, and taxing it has no bad incentive effects; it has on the contrary the positive incentive effect of encouraging investment into productive enterprises rather than into passive speculation in land. You might look up Henry George and "land value taxation". In the past two years, I have also seen my three favorite monetarist bloggers, Scott Sumner, Nick Rowe, and David Glasner endorse this taxation model. And Paul Samuelson and even Milton Friedman himself also endorsed it. It's probably got the best pedigree of any policy that has never had a chance of implementation.

    ReplyDelete
    Replies
    1. "The Wealth of Nations also contains great arguments in favor of financial regulations, public education, and public works."

      It also contains arguments against public schooling.

      "Those parts of education, it is to be observed, for the teaching of which there are no public institutions, are generally the best taught."

      The final conclusion of the very long discussion on education is that it would not be unjust to have some public support, but would also not be unjust, and might be more prudent, to leave schooling entirely private.

      And note that the level of public support he is suggesting is much lower than currently exists:

      "the master being partly, but not wholly, paid by the public, because, if he was wholly, or even principally, paid by it, he would soon learn to neglect his business."

      As we observe.

      Delete
    2. What you write is true. What I think is surprising in Smith's discussion of education, though, is his admission that there is a downside to the division of labor, and that education is a way to prevent people from becoming specialized idiots. The fact that he even sees this as a public concern shows that he has a very different attitude to public well-being from modern libertarians, who see market outcomes and small government as ends in themselves. I recall also being struck that in Smith's discussion of the Poor Laws, which he doesn't like, his rhetoric focuses on what he avers are the bad effects of these laws, rather than going with a principles-based argument. The implication (true or false) is that he would reconsider if he saw different evidence. Similarly, he explicitly allows that financial regulations are a violation of natural liberty, and in the next sentence affirms that they are desirable.

      It happens that I'm familiar with your argument with the Rothbard people over Smith's legacy. Do you think that was just Rothbard being intemperate, or was there some basis for his hostility?

      Delete
    3. "The fact that he even sees this as a public concern shows that he has a very different attitude to public well-being from modern libertarians, who see market outcomes and small government as ends in themselves."

      If you're going to define libertarianism in those terms, I don't think anyone will disagree that Smith is not a libertarian. But that doesn't describe all, or even most, libertarians. If you've read David Friedman at all, you'd know that he considers himself to be a libertarian that justifies his philosophy based on consequences rather than morals, so I don't think this is a the right argument to use here.

      Delete
    4. "justifies his philosophy based on consequences rather than morals"

      Considering libertarianism isn't a philosophy of morality, that would make sense. Though, I don't think that the consequentialist justification is necessarily correct, either. Then again, I see libertarianism as dealing with the justified use of aggression in a world of absolute property rights, which does not necessarily deal with consequences per se.

      Delete
    5. On the other hand, Ricardo rejected the argument for taxing land value, on the grounds that if the government supported itself by a land value tax the market value of land would depend on government policy--most obviously how land value was measured for taxation--and land would then end up being owned not by those who could best use it but by those with the best political connections. That's by memory, but I think accurate.

      Delete
    6. I've seen this about Ricardo before. Is the passage you refer to contained in Principles of Political Economy and Taxation, or is it in a letter or pamphlet or something? I don't remember seeing it in Principles.

      Delete
  5. "It is not very unreasonable" ... no, but that means it's still quite unreasonable :)

    ReplyDelete
    Replies
    1. I wondered about that, myself. :) Smith's rhetorical style and the custom of the time and place are pertinent to interpreting it. Understatement may have been the order of the day. :)

      Delete
    2. Yeah. I'm not sure how it should be interpreted myself. I'd need to read the rest of the book to see, I haven't read WoN.

      Delete
  6. If something is "not very unreasonable", then that thing may still be a little unreasonable.

    ReplyDelete
  7. I think it not very unreasonable to suggest to Will and Daniel Kuehn that they look up litotes. I would not be averse to admitting David Friedman has the more convincing reading, nor would it be terribly difficult to find similar examples in 18th century prose.

    ReplyDelete
  8. Hmmm... I always read the quote "not very unreasonable" to have a similar meaning as "not excessively unreasonable". Or in other words, "although unreasonable, and certainly not preferred, not completely unimaginable". In modern prose, "some small case can be made in favor of..."

    I've always felt that in the context of the rest of Smith's arguments on taxation, the above definition is agreeable.

    ReplyDelete

All anonymous comments will be deleted. Consistent pseudonyms are fine.