Adam Smith, in his The Wealth of Nations, put forward a description of how task specialisation and the division of labour spectacularly increased production and productivity. Economists of all stripes have since accepted this as obvious.
The possibility of specialisation, and the gains therefrom, depends of course on trade between specialists. If you specialise you must get the rest of what you need from specialists in those products. They are the ultimate consumers. Competition for trading partners, or consumers, will drive you to becoming more efficient i.e., to focus more on making your product or service desirable, and less on anything that does not contribute to that. Making a product desirable to other specialists must therefore become the primary purpose of the specialist’s productive activities.
Whenever a specialist thinks he can expand the provision of his product or service beyond what he can produce on his own he begins to think of roping in other people to the task. Historically these were relatives and later other trusted close community members. This expansion results in what we call an enterprise – an organisation whose purpose for existing is to produce the specialist services on an enlarged scale. An enterprise could produce any desired product or service, and it does not matter who founds them. An enterprise could be a private factory, a police force, a bank, a doctor or lawyers office, a school or university, a church, a communal farm, or a government department.
The fact that the prospects of an enterprise in competition with others depends on the desirability of its products or services, implies some truths. The most obvious truth is that providing employment is not the purpose of any enterprise. It may well be the primary purpose of the employed person, but it cannot be the purpose of the enterprise. Anyone an enterprise employs must contribute competently to the purpose of the enterprise. The founder and management cannot afford to entertain any exceptions because these threaten the continued survival of the enterprise. It is profoundly unjust and counterproductive to impose such practices on an enterprise when it did not contribute causally to anyone’s lack of employment or competence. By creating a product or service a community wants, enterprises are already doing all they can to meet the needs of the community they serve.
Take a railway company. The primary purpose is to transport goods or people from one place to another, safely and at a cost that is attractive. If the cost is not attractive the customer is incentivised to look to the competition, another rail line or perhaps a truck line. Given that the railway bears a certain minimum cost to operate at all, it in turn has an incentive to eliminate those costs that do not contribute to transporting goods and services cheaply and safely. That in turn implies that each person employed must be providing at least as much value to that purpose as they get in payment. Employing people for employment’s sake i.e., not because they provide that value, simply undermines the future prospects of the railway. The railway cannot afford to do that. Employment for its own sake is a no-no for any enterprise for the same reason.
Take a university. The original purpose of a university was to pursue the truth because it is a valuable thing to trade to the public and to students. Students are buying the value of the truth in order to sell it on to others – maybe as employees or as future truth producers themselves. Enterprises or individuals consume new truths because they may be able to use those to enhance their own products and services or invent new ones. Protecting the feelings of students unable to understand or accept new truths is not what a university should be doing. There should not be any university departments with that function.
Take government. The purpose of government is to provide things citizens cannot, such as order, protection, justice and coordination of activities that would otherwise be suboptimal. The latter would be enforcing rules that everyone has an incentive to flout but which if enforced would benefit everyone. For example, rules preventing pollution of a common dam when an individual’s pollution is negligible and would him money, but where collective pollution would destroy the dam.
Doing things that private citizens already do without help adds to the costs of government. It takes away productive resources from citizens and inhibits them from offering the same product/service competitively. The lack of competition increases the likelihood of inferior products and services. No doubt there are many functions, such as redistribution or housing, health and education for the poor, that are not worthwhile for private enterprise to produce.
Arguably government could see those as part of its primary purposes, but one could also argue they are not. For example, US citizens do not see redistribution as a legitimate government function. The US General Social Survey reveals that every demographic prefers a greater equality of outcome that exists. However, all races and social classes also reject government redistribution of income or wealth as solutions. I argue that the poor should provide something of value of their own to trade for those things. Government should restrict themselves to removing barriers to entry into the economy. Primarily, these are lack of property rights, low levels of skills, deficits in the rule of law and various forms of protectionism in the economy.
In short, it is a mistake to impose charity, other ‘social burdens’, environmental goals and probably rectification of past injustice on enterprises. Doing so has unanticipated side effects that everyone (other than those, like politicians, who will not bear the consequences) will likely regret. Fund those things without imposing burdens on enterprises. Charity or taxes that do not distort the market are a few approaches.
[Image: https://commons.wikimedia.org/wiki/File:Adam_Smith_statue_by_Alexander_Stoddart.jpg]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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