Bohanon: Good Economics Requires Humility

August 17, 2015

by Cecil Bohanon, Ph.D.

What is the key to prosperity for the state of Indiana and its counties and towns?

Economist Adam Smith argued all that is necessary to raise a society to the highest level of “opulence” is “peace, easy taxes and a tolerable administration of justice.” If these conditions prevail, then prosperity will emerge “by the natural course of things.” The quote is from the 1755 lecture notes of his student Dugal Stewart.

Unpacking the three conditions reveals Smith’s insight to be as true today as in the mid-18th century. Civil order is necessary for prosperity. Who is going to make an investment in worn-torn Syria? Closer to home, it is unlikely investors will be fronting new businesses in Ferguson, Mo., anytime soon. Protecting life and property is the first obligation of all governments.

“Easy” taxes also grease the skids. Note that the proposition does not say no taxes or even minimal taxes — rather, it suggests a tax burden that has some reasonable relation to the services the government provides. Unfortunately, this tells us little about what to tax at a local level (property? income?) or how to structure the tax (proportional or graduated scale?). However, we can surmise that if taxes are used to enrich a privileged class, or if they are designed to redistribute income from taxpayers to favored recipients, they are probably not easy taxes for everyone else.

Finally a “tolerable” administration of justice: Tolerable is one of those old-fashioned words my grandparents used. “Feeling tolerable today” meant that Grandma was doing OK, maybe OK plus, but not outstanding. Justice doesn’t have to be perfect, but it must reach some acceptable benchmark. I suspect when a municipality receives a fifth of its revenues from fines for minor parking and traffic infractions, as is the case in Ferguson, taxes are neither easy nor is justice tolerable. I also suspect this has something to do with the absence of peace in the jurisdiction.

Smith made a number of other observations relevant to local prosperity in his well-known “Wealth of Nations” in 1776 and in his final revision of his “Theory of Moral Sentiments in 1790.” The most important strain in his thinking, in my humble opinion, is that local council members and administrators should be humble.

The “magistrate” should avoid arrogantly believing he knows what is best for everyone or that his vision is the perfect fit for the community. He should carefully monitor local conditions and circumstances and listen to all his constituents — whether political allies or not. He should be wary of economic development fads. What works well in California or New York may not work at all in Indiana; what is good for South Bend may be irrelevant for Hartford City. And on the point: It is not what Mr. or Ms. Public Servant do that matters — it is what their constituents can do for themselves that is the key to prosperity.

Of course, this is all well and good until a specific action must be taken. Should EDIT funds be used for bicycle trails? Should the XYZ Company get a tax abatement? Should the governmental unit hire an extra worker for code ordinance enforcement or should the resources be used for better parks and recreation programs?

This far down in the weeds Smith gives no answer — nor is it reasonable to expect that any other expert can give definitive answers to local questions. Sound principles matter, but there is no substitute for local knowledge to answer local questions.

Cecil Bohanon, Ph.D., is a professor of economics at Ball State University.

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