Smith on the Proper Role of Government, Game-theoretically
25 Pages Posted: 20 Jan 2022
Date Written: January 18, 2022
Adam Smith’s view of the proper role for government in commercial societies remains a source of debate. Here we sketch out in simple game-theoretic terms the numerous public-goods provision and externalities problems on display in particular in Book V of The Wealth of Nations. Casting these problems in these terms highlights the strategic nature of the thinking that Smith brought to the analysis of these problems. It leads us to claim that Smith -- while he did not use these terms -- understood well the pervasive nature of inter- and externalities, as well as the related issue of reputational enforcement. Our approach allows us to identify Smith as an early (and perhaps the first) analyst of incentive-compatible state intervention. By showing how game theory can be fruitfully applied to Smith's oeuvre, we suggest a methodology that allows an answer to the question: "What would Smith say if he were alive today?" Such an answer is important in determining Smith's stance regarding the proper role of government which is, as Smith emphasized, very different in the different states of society.
Keywords: proper role of government, Adam Smith, game theory
JEL Classification: B10, B12
Suggested Citation: Suggested Citation