The Wealth of Nations · Chapter
III: Of the Expense of Public Works and Public Institutions explained
This chapter discusses the third duty of the sovereign: erecting and maintaining public works and institutions that are highly advantageous to society but not profitable for individuals.
What happens
This chapter discusses the third duty of the sovereign: erecting and maintaining public works and institutions that are highly advantageous to society but not profitable for individuals. It covers public works for facilitating commerce (roads, bridges, canals, harbors), institutions for particular branches of commerce (forts, ambassadors), and institutions for education. Smith argues that such works can often be self-funded through tolls or duties, and examines the role of joint stock companies and the inefficiencies of public endowments.
Themes in this chapter
Role of Government
Smith defines the sovereign's duty to erect and maintain public works and institutions that are beneficial to society but not profitable for individuals, such as roads, bridges, canals, and educational institutions.
Free Trade and Market Competition
Smith argues that joint stock companies often do more harm than good, breaking the natural proportion between industry and profit, and that private adventurers can supply demand more efficiently.
Wealth and Money
Discusses how tolls and duties on public works are ultimately paid by consumers, but the reduction in carriage costs makes goods cheaper, benefiting the consumer.
Characters to notice
- Great Britain
Mentioned in context of the justices of the peace and the six days labour for highway reparation.
- The French
Referenced regarding the oppressive Corvées under the intendants in France.
- The Europeans
Mentioned in the context of the custom of keeping ambassadors resident in neighbouring countries during peacetime, originating from commercial interests.
Key passages
“The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain.”
The sovereign's final responsibility is to build and support public works and institutions that greatly benefit society but are too costly for any individual or small group to profit from, so they cannot be expected to undertake them.
Smith outlines the rationale for government provision of public goods.
“When the carriages which pass over a highway or a bridge, and the lighters which sail upon a navigable canal, pay toll in proportion to their weight or their tunnage, they pay for the maintenance of those public works exactly in proportion to the wear and tear which they occasion of them.”
When vehicles and boats pay tolls based on their weight or size, they cover the cost of maintaining the roads and canals in proportion to the damage they cause.
Smith advocates for user fees proportional to usage as an equitable way to fund public works.
“The joint stock companies, which are established for the public-spirited purpose of promoting some particular manufacture, over and above managing their own affairs ill, to the diminution of the general stock of the society, can in other respects scarce ever fail to do more harm than good.”
Joint stock companies set up to promote a specific industry not only manage their own operations poorly, reducing society's overall capital, but also almost always cause more harm than good.
Smith criticizes joint stock companies for inefficiency and negative impacts on the broader economy.