In his first 100 days in office, President Joe Biden is demonstrating his preference for controlling other people’s money over letting them build future wealth. He had taxpayers finance a $1.9 trillion COVID-19 stimulus bill that has little to do with COVID relief. He’s encouraging Amazon’s employees to unionize. His green energy plans emphasize industry subsidies. His nominee to lead the Securities Exchange Commission appears in favor of helping activist investors mine company data for political purposes.
But even ardent Biden supporters should be concerned that his approach will make his goals financially unattainable. Why? This was one of the fundamental insights of Adam Smith in his impactful “An Inquiry into the Nature and Causes of the Wealth of Nations.” Just last week on March 9 we celebrated the 245th anniversary of its publication, and now is a good time for it to become required reading in the Biden administration.
Smith’s book was a best seller and became the foundation for modern economics. Writing in the tradition of the Scottish Enlightenment, his ideas rested on logical reasoning. He observed the workings of businesses and noticed how serving customers well benefitted businesses. He also noted their efforts to improve efficiency. One of his book’s greatest gifts was a clear explanation of how the interplay of independent decisions guides an economy to serve consumer interests and build wealth.
I was fortunate to read Smith’s book (twice) as an undergraduate. It wasn’t required reading, but it should have been. (I also read Karl Marx three years later. Once was enough.) Smith’s insights rang true to me. Growing up on my parent’s farm in Kansas, I had already noticed that the most successful businesses were those that focused on customers’ needs, didn’t waste money, and made both owners and employees more successful.
I had also noticed that future wealth depended on investment decisions being made by people who had skin in the game and stood to gain or lose depending on how well their investments performed for future customers. I observed that far-off bureaucrats and politicians rarely made decisions that improved businesses or made consumers better off.
These basic economic insights are too often missing in Biden’s decisions in his first 100 days. For example, the President’s recent memo on how agencies are to conduct cost-benefit analyses encourages them to place a long list of social agendas ahead of consumers. His aspirations to improve the environment, combat racism and pursue justice are laudable and should impact cost-benefit analyses. But giving them preeminence misses the larger point that a singular focus on these pursuits fails to build the economic foundation needed for progress. In a sense the president appears to fail to understand that economic resources are created by a vibrant free economy — not a heavily taxed and regulated one — and that regulation more often favors the politically powerful than the people who are struggling to improve their lives.
Another example where Smith’s insights would help the administration be successful is in fending off attacks on the consumer welfare standard in antitrust. Some of Biden’s advisors are attacking the well-established and rigorous yardstick that requires antitrust actions focus on consumer benefit, allowing businesses to compete fiercely with each other as they battle for customers. These advisors want to replace the consumer welfare standard with more nebulous notions of protecting competition, which sounds appealing, but that empowers politicians and bureaucrats to play favorites.
Smith warned against such fickle government control. He observed that when government officials tried to direct businesses in his time, the officials donned “an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.” In other words, markets should never be under the control of people who think they have enough wisdom and capability to control them for the public good. Only market incentives direct businesses to serve actual customer wants and needs.
If Smith were alive today, he would likely encourage Biden to shrink rather than grow the government’s role in people’s lives. With federal spending now around one-fourth of GDP, government has become the primary determinant of income and wealth for a large share of the population. And regulation is on the rise, giving people less say in their own lives. As Smith concluded, this ends badly.