The Visible Hand: Adam Smith on Equity

The Social Security debate is beginning to acknowledge the need for social insurance and the debate is shifting to how generous the social guarantee ought to be.

The right is arguing that the guarantee ought to be just above the poverty level. According to this line of reasoning, anything more generous than a poverty guarantee undermines the individual's incentive to take care of their own needs prior to retirement and makes them dependent upon the state for their existence. For example, a little discussed but important feature of private accounts is a mandatory annuity upon retirement to guarantee an income just above poverty. The AP reports that:

After a brief phase in, younger workers could invest two-thirds of their payroll taxes in the new personal accounts. They would be required to purchase an investment guaranteed to keep their income above the federal poverty level during retirement.

Note an important feature of this statement. The administration has no plans to guarantee the elderly anything above this minimal "poverty annuity."

What is a socially acceptable income guarantee for a citizen of the U.S.? This is a question of values and as such we cannot find the answer in economic theory. As I think about this, I have in mind a citizen who throughout his or her life contributed to society by going to work everyday, raising a family, doing charitable work, and so on, in short an outstanding citizen and valuable member of the community throughout his or her life.

Imagine that person, perhaps your mom, who has saved diligently for her retirement years. However suppose her husband has passed away, her only child is lost in an accident, and unexpected health issues at age 70 wiped out the considerable stock earnings she had accumulated over the years. Left all alone and devoid of resources, what guarantee should society provide to such a person as she lives into her 80's and 90's? What type of life is society willing to tolerate for such a person?

Adam Smith (1723–1790) is often cited in debates concerning the superiority of the private sector over government in the provision of goods and services, and his notion of an invisible hand is often used to justify a laissez faire approach to social problems.

What did Adam Smith say about how we should treat our poorest citizens? Here's a quote from An Inquiry into the Nature and Causes of the Wealth of Nations, Book 1, Chapter 8: Of the Wages of Labour, pg. 32:

Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers, and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged.

I don't think Adam Smith would have objected to a social guarantee that ensures people are "tolerably well fed, clothed, and lodged" as opposed to a poverty level guatantee for our disadvantaged and elderly citizens, and he recognized the need for government intervention into private markets when they do not provide adequate amounts of desired services. Those who espouse the virtues of the private market in every circumstance would be wise to heed Smith's words.

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