1. Adam Smith and the Welfare State Presented by Tony Quain ECON-827 Professor Klein April 27, 2006

2. Overview  Our inquiry: Would Adam Smith condone or promote the modern welfare state?  Smith in a pre-welfare age 1)Welfare states emerged in the late 19 th century 2)Public education is one form of indirect redistribution that existed prior to Smith (Scotland was first in 1561) 3)Income taxation does not appear until 1799 (Pitt) 4)Social insurance does not appear until 1889 (Bismarck) 5)How can we know Smith’s view on the welfare state? ECON-827 (Prof. Klein) Tony Quain “Adam Smith and the Welfare State” 2 Overview - Introduction

3.  Inquiry method 1)The first half of the presentation will explore Smith’s view of the role of the state; this covers questions (1) and (2) below 2)The second half of the presentation will explore Smith’s moral philosophy as it applies to welfare economics; this covers questions (3) through (6) below  Questions for our inquiry 1)What is Smith’s view of redistributive taxation? 2)What is Smith’s view of redistributive state spending? 3)What is Smith’s definition and application of equality? 4)What is Smith’s solution to poverty? 5)What is Smith’s definition of justice? What is his view of “social justice” or “distributive justice”? 6)What is Smith’s view of class stratification and redistribution? ECON-827 (Prof. Klein) Tony Quain “Adam Smith and the Welfare State” 3 Overview - Questions

4. The Role of the State  The Nature of the State 1)Origins of the State  States originated from the desire to protect property (r: 1.1.1)  States are made for the preservation of inequality (r: 1.1.2) 2)Character of the State  The extravagance of government spending (r: 1.1.3)  Liberty from government interference (r: 1.1.4) ECON-827 (Prof. Klein) Tony Quain “Adam Smith and the Welfare State” 4 The Role of the State – Nature of the State

5.  State Revenue 1)Four Maxims of Taxation  Equality, Certainty, Convenience, Efficiency 2)The Equality Maxim (r: 1.2.1)  Equality defined as proportional  Equality of income sources 3)Proportional Taxation: Does Smith have exceptions?  Taxes on the rich “not very unreasonable” (r: 1.2.2)  Taxes on luxury coaches an easy way to provide poor relief (r: 1.2.3)  The supremacy of proportionality (r: 1.2.4) 4)What is Smith’s view of redistributive taxation? ECON-827 (Prof. Klein) Tony Quain “Adam Smith and the Welfare State” 5 The Role of the State - Revenue

6.  State Expense 1)Three Duties of the State  Defense, Civil Justice, Public works (r: 1.3.1)  Exclusivity – Smith and enumerated powers  Smith also allows for the “Dignity of the Sovereign” as an expense 2)Defense  The insufficiency of militias and the need for standing armies 3)Civil Justice  The inequality of man arises from four things: personal abilities; age; fortune (luck); and birth (privilege)  Property and the need for civil justice protection (r: 1.3.2, 1.3.3)  Private court systems fail to prevent the corruption of judges ECON-827 (Prof. Klein) Tony Quain “Adam Smith and the Welfare State” 6 The Role of the State - Expense

7. 4)Public Works  Three principal areas of public works: facilitation of commerce; education of youth; instruction of people of all ages  Justification: only those public works which can not be provided by private industry are to be provided by state expense (r: 1.3.4) 5)What is Smith’s view of redistributive state spending? ECON-827 (Prof. Klein) Tony Quain “Adam Smith and the Welfare State” 7 The Role of the State - Expense

8. Moral Philosophy  On Equality 1)Trickle-down economics  Free trade extends benefits to the lowest ranks of society (r: 2.1.1) 2)Wage inequality  Inequalities as natural, market-driven (r: 2.1.2)  The sources of wage inequality (r: 2.1.3)  The requirements for employment equality (r: 2.1.4) 3)Wage and employment regulation  Policy intervention on wages is inequitable (r: 2.1.5)  Employment regulation is improper (r: 2.1.6)  Payment of wages-in-kind is unjust (r: 2.1.7) ECON-827 (Prof. Klein) Tony Quain “Adam Smith and the Welfare State” 8 Moral Philosophy – On Equality

9. 4)Risk-taking and entrepreneurship  Those who take risks should reap the rewards (r: 2.1.8) 5)The utility of inequality  Necessary to maintain the distinction of ranks and order (r: 2.1.9) 6)Undesirable inequalities (r: 2.1.10)  Monopolies  Inheritances in infinitum  Custom of primogeniture 7)What is Smith’s definition and application of equality? ECON-827 (Prof. Klein) Tony Quain “Adam Smith and the Welfare State” 9 Moral Philosophy – On Equality

10.  On Poverty 1)Absolute and relative poverty (r: 2.2.1)  The lowest in a free society are better off than the highest savages 2)Welfare of the poor (r: 2.2.2)  It is equitable and good that the poor naturally increase their status 3)The Poor Laws (r: 2.2.3)  The Poor Laws are unjust because they restrict the free movement of labor 4)Market eradication of poverty (r: 2.2.4, 2.2.5)  Poverty causes the population to decrease until it reaches a level of economic efficiency  Like any other species, man multiplies in proportion to the means of his subsistence 5)What is Smith’s solution to poverty? ECON-827 (Prof. Klein) Tony Quain “Adam Smith and the Welfare State” 10 Moral Philosophy – On Poverty

11.  On Justice 1)Definition of justice (r: 2.3.1, 2.3.2)  Justice is a negative virtue  Force is only justified for negative virtues, not charity or generosity  Justice does not require any action 2)Justice, envy, and utility comparisons (r: 2.3.3, 2.3.4)  Justice is absolute, while propriety of conduct relies on judgment  Justice does not subscribe to diminishing marginal utility of wealth 3)Distinguishing commutative and distributive justice (r: 2.3.5)  Commutative: Avoidance (and punishment) of positive harm  Distributive: Rendering esteem and respect to merit ECON-827 (Prof. Klein) Tony Quain “Adam Smith and the Welfare State” 11 Moral Philosophy – On Justice

12. 4)Does Smith pave the way for a modern socialist conception of distributive justice (the Fleischacker thesis)?  Smith dismissing property rights in times of necessity? (r: 2.3.6)  Smith as a precursor to Rawls? (r: 2.3.7)  Smith as a “founding father” of distributive justice? (r: 2.3.8) 5)What is Smith’s definition of justice? What is his view of “social justice” or “distributive justice”? ECON-827 (Prof. Klein) Tony Quain “Adam Smith and the Welfare State” 12 Moral Philosophy – On Justice

13.  On Class and Redistribution 1)The perils of class warfare (r: 2.4.1, 2.4.2) 2)Quesnay and the efficiency costs of redistribution (r: 2.4.3) 3)The importance of civic virtues (r: 2.4.4) 4)The “poor man’s son” and the progress of mankind (2.4.5) 5)What is Smith’s view of class stratification and redistribution? ECON-827 (Prof. Klein) Tony Quain “Adam Smith and the Welfare State” 13 Moral Philosophy – On Class and Redistribution

14. Conclusion  Would Adam Smith condone or promote the modern welfare state?  Follow-up Questions 1)Is Smith’s view of the modern welfare state important? 2)Is Smith’s economic philosophy diminished or augmented by his view of the welfare state? 3)Is it possible to have an economic system which is laissez-faire but which serves a redistributive end goal? ECON-827 (Prof. Klein) Tony Quain “Adam Smith and the Welfare State” 14 Conclusion