krebscycle

[Adam] Smith claims that the system of natural liberty; with government restricted to the rule of law, infrastructure, defense, and education; is the best of all social arrangements.  Brad Delong.

Oh, a government restricted to just those few minor things: judges, cops, laws (such as those determining property rights and union control), transportation, power and water, the Army and Navy and all their procurement and drafts (impressment), and lets also throw in education. That hardly touches anything at all, right?  Leaves the economy to operate in a natural state? Because invading China to open up markets for a government monopoly opium business is somehow “hands-off” ?

A government like that of the USA or the UK during the height of laissez-faire, with “rule of law” that suppresses labor unions, infrastructure that favors some social  or ethnic groups over others, “defense” that involves world-wide military adventures to control markets and resources, and educational policy that  maintains class privileges is a very active participant in economic decision making. All governments are active participants in economics. The fiction of economics is that certain types of active government are consistent with “natural liberty” and therefore invisible or barely visible or at least not spoken of in polite company. Thus, the “free trade” era in the UK in  the 1850s as the invisible hand guides UK firms to invest in slave labor in the southern USA with slaves kept in bondage by relentless state violence and terror, participate in the East India Company opium monopoly, call the army out to kill union organizers, and address balance of payments issues by having the navy shell China to protect state supplied narcotics dealers. The epic injustices of this era are, according to the liberal economists, addressed by letting the government at long last intervene in the economy via regulations and social welfare.  But having accepted the axiom of right wing economics that the State that only enforces the Combination Acts and prosecutes the Opium War is not managing the economy, the liberal economists keep getting tangled up on their own shoelaces. The assumption is that social democracy inserts the government into economic activity and this view  depends on making  all the other stuff invisible.

By the way, Adam Smith favored government regulation of interest rates. He was not as impressed with the wisdom of rich men as were Victorian Imperialist Alfred Marshall or Professor Fred Hayek, the advocate of torture and rape in the name of freedom.