Poor Adam Smith must be spinning in his grave after Joe Hockey’s entitlement speech. Happily for Smith, Hockey managed to avoid invoking his name until the end of his talk. Unhappily, Hockey invented for Smith an eponymous and rather threatening "free hand" with which the long-dead moral philosopher was "to punish nations who ignore the fundamental rules".
What fundamental rules? And, come to that, what free hand? We’ll need to make some inferences about what Hockey might have meant, but first let’s go back a few steps.
I’m assuming that Hockey’s Adam Smith was the one who wrote The Theory of Moral Sentiments and An Enquiry into the Nature and Causes of the Wealth of Nations. Smith, who is sometimes referred to as the father of modern economics, is generally credited with popularising market economics (also known as laissez-faire or neo-classical economics) via Wealth of Nations.
Market economics is currently the dominant global economic paradigm and, as with other paradigms (for example, Marxism), it can be vulnerable to over-zealous interpretation that might confuse the underlying theory and fall prey to ideology.
I have a hunch that Hockey meant Adam Smith’s invisible hand, rather than his free hand, which is often interpreted as the invisible hand of the market. Interestingly, the invisible hand was a metaphor of its time when (nearly) everyone went to church and believed in God — the invisible hand is His.
It’s thus worth examining Smith’s work very briefly in his own historical context, better to understand his meaning and intentions, and to clarify a few matters.
In Smith’s work the invisible hand guides the flawed human to make the right choice. It first appears, fleetingly, in Theory of Moral Sentiments where it guides a rich, rapacious landlord to share his produce with the poor after he’d already taken what "is most precious and agreeable". The invisible hand briefly reappears in Wealth of Nations, where once more it guides someone’s choice, this time to consume domestic products rather than foreign imports, thereby benefitting society and pleasing himself.
While Smith’s invisible hand guided people, the natural philosopher William Paley referred to an invisible hand that guided nature. In Paley’s example it pinned a bird to her nest when, if not for the drive to hatch her eggs, "as an animal formed for liberty" she would rather have been elsewhere
So if Smith and Paley were referring to the invisible hand of God, what did Hockey’s "free hand" have to do with Smith? What are the fundamental rules he says nations are ignoring, and why did Hockey have poor Smith down in the gym training for one almighty whack?
Given that Smith called men in Joe Hockey’s profession "that insidious and crafty animal vulgarly called a statesman or politician" it’s perhaps unfortunate that his name was invoked by Hockey in an attempt to promote an essentially ideological position.
Ben Eltham’s critique of "The End of the Age of Entitlement" provides an excellent overview of Hockey’s speech in the context of more recent economic history and policy and his comment that the argument is simplistic is cogent.
Hockey’s argument also seems disingenuous. Given the importance of the issue, and what’s at stake, a brief attempt at clarification of Smith’s position, and what Hockey might have meant, is warranted.
Whether or not we concur that market economics is the best paradigm for Australian society, most people would agree that whichever paradigm we use, it should be applied in a manner consistent with the underlying theory. There is no doubt that Adam Smith believed in the free market, and in Wealth of Nations he advocated how it might be used to generate and allocate wealth to maximise benefits to society overall.
Smith was concerned about poverty and inequality and while he believed that generally the market could best allocate resources, he also suggested a system of checks and balances, noted numerous exemptions, and suggested social services that the government should provide. Smith was not ideologically opposed to government intervention, or taxes, or government subsidies of public services and public infrastructure.
Conversely, he wasn’t enthusiastic about taxpayers subsidising the private sector, and he strongly believed that anyone who profited from the use of public infrastructure, services or resources should pay the government for them.
While it’s not clear exactly what Joe Hockey meant by fundamental rules, I’m hazarding a guess that he was referring to Smith’s rules for the free market paradigm, especially those relating to government funding of social services.
In Wealth of Nations Smith devoted over 200 pages to discussing the role of government, which included levying taxes, funding public infrastructure and providing services. There are some common misconceptions about Smith’s intentions in Wealth of Nations.
Essentially, Smith’s "fundamental rules" for government funding and support depended on something being "for the benefit of the whole society". It would be paid for by taxes that "should be defrayed by the general contribution of the whole society; all the different members contributing, as nearly as possible, in proportion to their respective abilities".
Among other things, Smith proposed that government should fund defence, road construction and maintenance, communications, and institutions for education. Furthermore, "when the institutions, or public works, which are beneficial to the whole society, either cannot be maintained altogether, or are not maintained altogether, by the contribution of such particular members of the society as are most immediately benefited by them; the deficiency must, in most cases, be made up by the general contribution of the whole society".
In other words, Smith supports subsidies for public works if they benefit society — he makes no call for everything to be run at a profit, nor to be privatised. In some instances, such as for education, Smith felt that it was acceptable for those benefitting from education and/or for the public purse to pay because both society and the private individual benefit.
Whatever Hockey meant about the fundamental rules, Australia does not appear to have over-indulged her citizens. What with failing public private partnerships, taxpayers are sometimes having to pay an awful lot for things that Smith would have been happy for government to fund completely, since they benefit society as a whole.
Given that Australia’s doing well, is it really too much to ask for a pension when we’re old, support if we’re disabled, or a bit of help if we’re out of work? Smith wanted to maximise social welfare through a range of policies. What Joe sees as over-entitlement, Adam would probably view as "for the general benefit of the whole society".
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