Is the 1755 Smith a Prequel of the 1776 Smith?

invisible hand system of natural liberty regulation property rights night watchman state government intervention hong kong

Kwok Ping Tsang for AdamSmithWorks

October 6, 2021
Below are two often-quoted paragraphs that are attributed to Adam Smith, and they are so succinct that they are worth quoting in full:
Man is generally considered by statesmen and projectors as the materials of a sort of political mechanics. Projectors disturb nature in the course of her operations in human affairs; and it requires no more than to let her alone, and give her fair play in the pursuit of her ends that she may establish her own designs. Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.

We do not know if Smith actually wrote the above and presented a paper in 1755, as we can only see them quoted in Account of the Life and Writings of Adam Smith by his student Dugald Stewart (1795). The original document that Stewart saw was destroyed, and we only have Stewart’s quoted words to rely on.
Authenticity aside, how much is the Smith in 1755 a prequel of the Smith in 1776? Some argue that the 1755 Smith is a “night watchman” or libertarian version, and the later Smith in The Wealth of Nations (WN hereafter) is a more moderate one that supports a lot more government interventions. In particular, the phrase “peace, easy taxes, and a tolerable administration of justice” is interpreted as the government having a minimal role, only providing security, resolving legal disputes, and keeping taxes low, but in WN Smith clearly recommends a lot more than those three things.
Here I contend that that is not an accurate interpretation of the two paragraphs and that they actually constitute a summary, or prequel, of WN.
First, a main theme in WN is that the natural course of things is constantly disrupted by the ill-conceived plans of “projectors." The “political mechanics” are based on the wrong assumption that people are easily manipulated, ignoring that they not only react to incentives but also have their own aspirations and goals. Second, in order for the invisible hand to do its job, certain assumptions are needed. The three things mentioned by Smith in 1755 are essentially well-protected property rights: the right to earn an income that is not threatened by erratic and exorbitant taxes, the right to own something and not subject to the danger of conflicts and wars, and, whenever properties are stolen or damaged by others, the right to have the government step in, delineate such rights, and deal out the appropriate punishments. But, as is frequently the case, if the government wants to direct the development of the society to some other direction, it has no choice but to impose more regulations in order to restrict what people can do.
To make my case, I further summarize Smith’s two paragraphs into two principles. While they are not as pithy as the originals, they do make Smith’s reasoning clear.

First Principle: People cannot be easily manipulated, and they usually end up not doing what the government tells them to.
Smith’s idea of humans is complex. To better one’s condition is the main motivation of life, and people always try to get what they want despite what the government tells them regarding what and what not to do. There are plenty of such examples in WN.
There is always an information problem. While the government may think that they know what is good for society, they simply do not have the information to make the right moves.
What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. (WN, IV.ii.10)

As argued again by F. A. Hayek (1945) almost 200 years later, all of us have some local knowledge that only we or a handful of other people know. The “local situation” can be a new product, a neat invention, a marketable idea, or just a change in what consumers prefer. The government cannot possibly get hold of such knowledge, and under some “folly presumption” their policy is likely to fail.
Sometimes people are just too clever for the government to handle. Under the influence of mercantilism, the government tries to provide incentives to encourage exports and discourage imports, but the results are often the opposite of what they hope for.
The high duties which have been imposed upon the importation of many different sorts of foreign goods, in order to discourage their consumption in Great Britain, have in many cases served only to encourage smuggling, and in all cases have reduced the revenue of the customs below what more moderate duties would have afforded. (WN, V.ii.k.27)The bounties which are sometimes given upon the exportation of home produce and manufactures, and the drawbacks which are paid upon the re-exportation of the greater part of foreign goods, have given occasion to many frauds, and to a species of smuggling more destructive of the public revenue than any other. In order to obtain the bounty or drawback, the goods, it is well known, are sometimes shipped and sent to sea, but soon afterwards clandestinely relanded in some other part of the country. (WN, V.ii.k.28)

Duties that are supposed to reduce imports encourage smuggling, and bounties that are supposed to raise exports are exploited by sneaky traders. People just do not behave like well-trained animals. Worse, as in the case of some other mercantilist policies, it is the clueless government that is manipulated by some smart lobbyists.
This principle is also related to a point brought up by McCloskey (2016). Unlike the way in which economics is often taught in textbooks, to Smith, people are not “rational” in the sense of reacting mechanically to incentives like animals respond predictably to rewards and punishments. It is never easy for the government to tell or nudge people to do things, just like it is difficult to manipulate the behavior of people by merely changing some “meaning-free incentives.” When people “truck, barter, and exchange,” Smith also implies that they talk, gossip, persuade, and collude. Such humans are not obedient and malleable “materials” in the process of some “political mechanics.”

Second Principle: Since people often “misbehave," in order to move the society in a certain direction, more rules are needed to coerce people to do certain things.
Kennedy (2005), among others, interprets “peace, easy taxes, and a tolerable administration of justice” as a description of a minimal state, and he further points out that no country in history comes even close to such an ideal.
I would like to quibble a bit that the city of Hong Kong, at least until recently, is a notable case of such an ideal. And for Smith, I believe that the then American colony, where for a long period of time people were free to cultivate plenty of land without much interruption from the ruler in Britain, also comes near (though Smith would like to see more freedom of trade to and from the colony).
The “night watchman” interpretation also misses an important point. The focus of Smith in WN is not the ideal but how government deviates from it. Since most governments like to divert economic development to some desired end, such as bringing up the trade balance or making cities prosper, they need to go beyond providing the three things and impose increasingly complicated and oppressive regulations on people, much like disobedient animals need to be put on leash. Liberty has to be reduced to make room for some societal goals.
Again, WN abounds with examples of such oppression. To prevent exportation of wool, the main motivation of which is to keep the price of that input low for manufacturers, harsh laws were once imposed. People could have their hands cut off or even executed for violating some intricate and cumbersome rules. Smith puts it rather bluntly:
But the cruellest of our revenue laws, I will venture to affirm, are mild and gentle in comparison of some of those which the clamour of our merchants and manufacturers has extorted from the legislature for the support of their own absurd and oppressive monopolies. Like the laws of Draco, these laws may be said to be all written in blood. (WN, IV.viii.17)

The poor law is another topic that Smith discusses at length. Despite the good intention of establishing a welfare system for people in need, the law was made more and more complicated in order to stop people, both the receivers and providers of welfare, from “misbehaving." Smith particularly disapproves of the oppression of limiting people’s freedom of abode.
To remove a man who has committed no misdemeanour from the parish where he chuses to reside, is an evident violation of natural liberty and justice. The common people of England, however, so jealous of their liberty, but like the common people of most other countries never rightly understanding wherein it consists, have now for more than a century together suffered themselves to be exposed to this oppression without a remedy. (WN, I.x.c.59)

Another example comes from the long criticism of the management of colonies. On the restrictions of trade in America, he laments that: To prohibit a great people, however, from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind.(WN, IV.vii.b.44)
To achieve some policy goals, people are banned from doing certain things, and the “most sacred rights” of choosing what to invest in and where to invest are taken away.
Now the logic behind the two paragraphs of the 1755 Smith is clear. People are hard to manipulate, and the system of natural liberty rightly leaves people more or less alone to pursue their goals, and opulence will follow. But when the government has some other course of development in mind, it has no choice but to deviate from simply providing “peace, easy taxes, and a tolerable administration of justice" and put in place regulations and restrictions to nudge or coerce people to do certain things.

Making things better on an unnatural course
In more details and with somewhat different wordings, Smith brings up the three things again in WN.
According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings: first, the duty of protecting the society from violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence to any individual or small number of individuals, though it may frequently do much more than repay it to a great society. (WN, IV.ix.51)

The description of “peace” is essentially the same, and “administration of justice” needs to be “exact” instead of “tolerable." The biggest change is for “easy taxes," which now includes providing public work that the private sector does not find it profitable to engage in. While the scope of government under “the system of natural liberty” has expanded somewhat from 1755 to 1776, the three things are still far from the list of regulations and interventions that Smith himself supports and recommends throughout WN.
In a famous article, Jacob Viner (1927) compiles such a list, leading him to conclude that Smith “is not a doctrinaire advocate of laissez faire." According to Viner, Smith:
makes several concessions to the mercantilistic policy of regulation of the foreign trade. He admits that there are circumstances under which export restrictions on corn may be warranted; he approves of a moderate export tax on wool on the ground that it would produce revenue for the government and at the same time would afford an advantage over their foreign competitors to the British manufacturer of woolens; he favors moderate taxes on foreign manufactures, which would still give to domestic workmen ‘a considerable advantage in the home market’.

So which is it? A small government or a pretty large one that gets into a lot more than those three things?
Remember that Smith is a pragmatist, knowing that a perfect system of natural liberty is mostly an ideal, and in reality governments often try to thwart or distort economic development in some ways and end up being oppressive and tyrannical to some extent. Given that we are already on such an unnatural course, merely focusing on the three things is not enough, and more work is needed to reduce the harm caused by oppression.
For example, the trade policy “concessions” by Smith are all proposed under the shadow of a myriad of mercantilist policies in effect. To make the best out of a bad situation, Smith is happy to just move those policies in a less destructive direction. Here is Smith at his most pragmatic stance: To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it. (WN, IV.ii.43)
Indeed, expecting a system of natural liberty in reality is equally utopian, and Smith, ever so shrewd and practical, uses WN not only to provide an ideal benchmark to compare the real one against, but also to convince readers that it is possible to make the government less oppressive and tyrannical, reducing one folly at a time.

Related Links
Charles L. Hooper, Mercantilism Lives, at Econlib

Hayek, Friedrich A. (1945). The use of knowledge in society. The American economic review, 35(4), 519-530.
Kennedy, Gavin (2005). A ‘Night Watchman’s State?. In Adam Smith’s Lost Legacy (pp. 215-218). Palgrave Macmillan, London.
McCloskey, Deirdre. N. (2016). Adam Smith Did Humanomics: So Should We. Eastern Economic Journal, 42(4), 503-513.
Smith, Adam. An Inquiry Into the Nature and Causes of the Wealth of Nations, Vols. 1–2 of The Glasgow Edition of the Works and Correspondence of Adam Smith, edited by R. H. Campbell, A. S. Skinner, and W. B. Todd. Oxford: Clarendon Press and Indianapolis: The Liberty Fund (1976).
Stewart, Dugald (1795). An Account Of The Life And Writings Of Adam Smith, LLD. The Edinburgh magazine, or Literary miscellany, 1785-1803, 5, 9-14.
Viner, Jacob (1927). Adam Smith and Laissez Faire. The Journal of Political Economy, 198-232.