Adam Smith's Jurisprudence

slavery administration of justice natural law principal-agent problem

Charles Korsmo for AdamSmithWorks

January 5, 2022
It pains me to note that Adam Smith is not particularly well-known for his contributions to jurisprudence. I will admit—only somewhat sheepishly—that I was only dimly aware of his Lectures on Jurisprudence and had no personal acquaintance with it until quite recently. I do not believe that would make me unusual even among jurisprudes, let alone among the coarse and lowly breed of corporate law scholars. No doubt, this relative obscurity can be at least partially explained by the fact that—unlike Smith’s more celebrated works, Theory of Moral Sentiments and The Wealth of Nations—no polished version of the Lectures survives in Smith’s own hand. Instead, all we possess are notes of the lectures made by students, the most complete set of which was not published until the 1970s. As such, the Lectures could not possibly play the foundational role in modern thinking played by Smith’s other works.
The subject and method of the Lectures are also not necessarily conducive to the easy enjoyment of the modern reader. One contemporary scholar, in noting their lack of major present-day influence, describes the Lectures as primarily consisting of “fairly formal exercises in Roman and natural law.”1 Moreover, “Smith’s use of a priori arguments based in common reason alongside functionalist evolutionary arguments can seem discordant to the [modern] reader.”2
Rooted in the natural-law tradition of his time, Smith’s notions of justice—like his notions of morality developed in Theory of Moral Sentiments—are often founded in assumptions about sentiments he supposes to be widely, if not universally, shared. This is typified by his axiomatic claim “[t]hat a person has a right to have his body free from injury, and his liberty free from infringement unless there be a proper cause, no body doubts” (LJ 401).” This may be so at some level of generality. But this limited agreement comes as cold comfort when considering the potential scope for disagreement over what constitutes “proper cause.” As skeptics of “natural law” argumentation have noted, “[t]he fact that not everyone agrees on what is ‘evident to reason,’ to use Smith’s phrase, limits the utility of the natural-law method” (Mahoney 224) “Natural law” is a particularly unreliable ally in our own day. In an increasingly multicultural society, sentiments may vary with respect to quite fundamental propositions. Natural law tends to desert the field precisely when battle is joined.
Smith largely, but not entirely, sidesteps this weakness through his suggestion that legal systems and principles—and the sentiments from which they arise—are shaped by the peculiar circumstances of the relevant society, and the functions they can serve in those circumstances. As in his other works, he traces the evolution of legal systems and principles as they develop from hunter/gatherer societies, through pastoral societies and agricultural societies, and finally to the commercial society of his day. It is Smith’s functional and evolutionary speculations that most resemble, and in some ways presage, the Law & Economics approach developed over the past half-century.
Whatever their peculiarities from a modern perspective, it is unsurprising that, like all of Smith’s work, the Lectures are chock full of arresting passages and insights. To take a minor example, Smith notes that wealth tends to confer more authority on a person than superior strength or mental capacity, or age, or even wisdom and experience. Furthermore, he argues that wealth confers authority not through mere power or the groveling of toadies and supplicants, but rather through the fostering of genuine respect and admiration (LJ 401). I was tempted to scoff at what initially struck me as an outmoded expression of old feudal sentiments, until I came to the chagrined realization that it accurately reflects the current American political landscape.
It is also jarring to see Adam Smith—often simplistically regarded as an icon of laissez-faire—voicing prescriptions that would likely get him booted out of his local Objectivist convention. For example, in his sections on tax law in The Wealth of Nations, Smith proposes higher taxes to discourage certain rental practices that he regards as disadvantageous for the parties who voluntarily agreed upon them: “By rendering the tax upon such [practices] a good deal heavier than upon the ordinary rent, this hurtful practice might be discouraged, to the no small advantage of all the different parties concerned, of the landlord, of the tenant, of the sovereign, and of the whole community” (WN 831). Social engineering through the tax code! A few pages later, he proposes a “house-tax” that looks very much like a luxury tax, or even a wealth tax:
The luxuries and vanities of life occasion the principal expense of the rich; and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be any thing very unreasonable. It is not very unreasonable that the rich should contribute to the publick expense, not only in proportion to their revenue, but something more than in that proportion. (WN 842)

This is not to suggest that Adam Smith, were he alive today, would be wearing an “I Have a Plan for That” button on his lapel as he rides his scooter to his office at the CFPB. I feel confident he would not. But it does suggest that when a work spells “public” with a terminal “k”, a certain degree of caution is appropriate in translating its insights into specific policy proposals for the very different material and social circumstances of the present day.
Two sections of the Lectures, however, stand out as particularly striking and highly relevant to topics of present-day concern. The first contains Smith’s reflections on the institution of slavery. Though the stain of slavery has always been with us, the 400th anniversary of the arrival of the first African slaves in the American colonies has occasioned a revival of public interest, of which the New York Times’ 1619 Project is emblematic. Serfdom and other forms of slavery had, of course, died out in Great Britain at the time Smith delivered his Lectures, but he had occasion to note that “[a] small part of the west of the Europe is the only portion of the globe that is free from it, and is nothing in comparison with the vast continents where it still prevails,” (LJ 452) a perspective often missing from modern American-centric discussions of slavery. Smith’s account of the forces conducive to emancipation ascribes little role to moral qualms and “by no means the spirit of Christianity. (454) Rather, Smith employs a startlingly modern blend of what would now be called public choice theory and principal-agent problem economics.
Smith describes first a process of gradual weakening due to slavery’s inherent inefficiencies. He argues that “[a] freemen who works for days wages will work far more in proportion than a slave in proportion to the expence that is necessary for maintaining and bringing him up” (453). This is so, he argues, because, for a slave, “the surplus goes to the master, and therefore they are careless about cultivating the ground to the best advantage. A freeman keeps as his own whatever is above his rent and therefore has a motive to industry” (453). Citing a number of empirical statistics to support this contention, Smith concludes that the United Kingdom’s “colonies would be much better cultivated by freemen” (453).
What Smith has described is the principal-agent problem and the agency costs that result. Whenever one person (the principal) engages another (the agent) to act on his behalf, he faces the problem that the agent will have incentives that differ from those of the principal. As a result, the agent will face an ever-present temptation to act in his own interest, rather than that of his principal. It is little exaggeration to say that this so-called “agency problem” is at the heart of modern corporate law. The corporation is characterized by the separation of ownership and control, with shareholders owning the company, while directors, managers, and other employees control it.3 Since at least the 1970s, it has been recognized as the central challenge of corporate law to ensure that those in control of the company will use that control to benefit the owners.4
Smith’s discussion of slavery elucidates many of the key insights of principal-agent economics, but with two hundred years’ priority. It also bears on the present-day debate over the centrality of slavery to the development of the early American economy. His evidence that slavery creates a particularly vicious agency problem strongly suggests that—whatever its appeal to the slaveholding class—human bondage will almost always be woefully inefficient in a market economy, in addition to its other manifest evils. Indeed, Smith’s argument presages Alexis de Toqueville’s famous contrasting of the north and south banks of the Ohio River some 70 years later: the north, free side alive with “a confused hum…of industry,” and the south, slave side where men are idle and “nature alone offers a scene of activity and of life.” This stands in contrast to the arguments of 18th and 19th century apologists for slavery that, without it, the early American economy would have suffered crippling labor shortages making the development of the continent impossible.
Strangely enough, such arguments are again in vogue. It is a bitter irony that many modern commentators—working from very different motivations—often credit versions of them. Smith’s insights, however, strongly suggest that slavery provided little, if any, material benefit to anyone beyond the slaveholders themselves. The fact that post-emancipation cotton production exceeded pre-war levels within a decade of the end of a war that had devastated Southern infrastructure provides further evidence that slavery was not even vital to the Southern cotton economy. As historian James Oakes recently noted: “Slavery made the slaveholders rich. But it made the South poor.” Smith lucidly explains how slavery stood as a titanic and wicked obstacle to the development of a far more productive market for free labor. The experience of American slavery stands as a stark tribute to the depths providers of capital may be willing to sink in an effort to avoid paying market-clearing wages.
How, then, in Smith’s account, is the evil obstacle of slavery overcome? Again, Smith has anticipated by two centuries an important branch of economics and legal theory—public choice theory. In attempting to predict the behavior of public officials, public choice theory postulates that those officials will act in their own interests rather than in the interests of some perceived common good.5 Smith observes that emancipation typically stems not from moral consensus, but rather via the machinations of officials seeking to aggrandize themselves. He suggests that emancipation is typically imposed by a sovereign and clergy eager to dissolve ties that create rival power centers in the persons of the slaveholders:
By the feudal law, the lord had an absolute sway over his vassals. In peace he was the administrator of justice, and they were obliged to follow him in war. When government became a little better established, the sovereign did all he could to lessen this influence, which on some occasions was dangerous to himself….Another cause of the abolition of slavery was the influence of the clergy…Whatever diminished the power of the nobles over their inferiours increased the power of the ecclesiastics. As the clergy are generally more in favour with the common people than the nobility, they would do all they could to have their privileges extended, especially as they might have expectations of reaping benefit by it.” (LP 454)

Rather alarmingly to modern sensibilities, Smith concludes that the dynamics leading to abolition are more likely to obtain in a monarchy than a “free” or democratic government. “In a free government the members would never make a law so hurtfull to their interest, as they might think the abolishing of slavery would be. In a monarchy there is a better chance for its being abolished, because one single person is lawgiver and the law will not extend to him or diminish his power, tho’ it may diminish that of his vassals” (453).
It is difficult not to ponder Smith’s arguments in connection with abolition in the United States, still a century off at the time the Lectures were delivered. We are perhaps accustomed to consider the abolitionist movement as first and foremost a moral crusade, influenced and sometimes led by clergymen like John Rankin and Henry Ward Beecher. But it is a melancholy reflection that—whatever the motivations of its authors—emancipation did not come to America until it could serve to aid in breaking the political and military power of the Southern aristocrats, then in rebellion against the central government.
The second topic of special interest is Smith’s depiction of the interplay between judges and legislation. In our own age, the proper role of the judiciary is an issue of recurring controversy, with sharply different views on the political left and right. At the risk of caricature, the stock right-wing view is—in the metaphor used by Chief Justice Roberts—that judges should endeavor to serve as neutral umpires calling balls and strikes according to rules created by someone else: primarily legislatures and their delegees. The judge should, in this view, strive to avoid imposing his own policy preferences in resolving disputes. Instead, he should restrict his efforts to interpretation and application via textual analysis, and resort to investigation of legislative “purpose” or policy analysis only as a last resort. To oversimplify again, the stock left-wing view is that the judge plays—and ought to play—a policy-making role in his own right. The judge should strive to resolve disputes in a fashion that will further justice according to his own conceptions of justice. In doing so, he is of course constrained by legislation. But he should, at the very least, interpret those constraints in light of the purposes he divines in the legislation, and perhaps in light of his own views of what would constitute good public policy.
My own views incline far more towards the former, at least as an ideal. In our own time, characterized by ubiquitous statute and regulation, backed by a written Constitution, it seems natural to view the judicial role as one primarily of interpretation and application. In this light, the judge is imbued with authority by the pronouncement of the regulator, legislator, or “the People,” so to speak.
Adam Smith, however, thrusts us into an earlier era of common law judges who were often the direct extension of a combined executive and legislative power vested in a single sovereign:
The legislative power was absolute whenever it was introduced, but it did not exist in the beginnings of society. It arose from the growth of judicial power. When the judicial power became absolute, the very sight of a judge was terrible as life, liberty, and property depended on him….To a rude people a judge is the most terrible sight in the world. When property was extended it therefore became necessary to restrain their arbitrary decisions by appointing strict rules which they must follow. Thus the legislative power was introduced as a restraint upon the judicial. (434)

In this conception, judges begin with essentially plenary authority to resolve disputes within their general jurisdiction according to their own lights. This authority is then hemmed in by statute. This historical perspective frames the judicial role in a different light and raises a host of questions. Does it strengthen the case for textualism and judicial restraint as an ideal, so as to support the restraining function of legislation? Or does it suggest that judges are and ought to be unbound except where unequivocally bound, creating an obligation on the part of the legislature to draft statutes that leave no wiggle room for judges to reach forbidden outcomes? After all, it is a well-known canon of statutory interpretation that statutes in derogation of the common law are to be narrowly construed. And, as Smith suggests, in the beginning all was common law.
It is, of course, open to debate whether Smith’s analysis of the interplay of judicial and legislative power is or should be relevant to the American system, where the judicial power is itself created and defined by Constitutional and statutory provision. But the historical depth and pervasive insight of even one of Smith’s lesser-known works makes it a thought-provoking and fruitful object of study to this day.

Related Readings
Adam Smith and Jurisprudence, suggested readings
Clark Neily, A Modern Lawyer and Smith's Lectures on Jurisprudence
Jack Weinstein, Adam Smith on Slavery

  1. Heath Pearson, Origins of Law and Economics: The Economists’ New Science of Law, 1830-1930, 19 (Cambridge University Press 1997).
  2. Paul G. Mahoney, Adam Smith, Prophet of Law and Economics, 46 J. Legal Stud. 207, 224-25 (2017).
  3. See Adolf Berle, Jr. & Gardiner Means, The Modern Corporation and Private Property (1932).
  4. See Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. of Fin. Econ. 305 (1976).
  5. See, e.g., Duncan Black, The Theory of Committees and Elections (1958); James M. Buchanan & Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy (1962).