National defense

Some defense expenditures may not contribute to such security at all; some expenditures may contribute a great deal; and some expenditures may, by stirring up hornets’ nests, actually reduce security.

Public choice economists (see public choice) have shown that a democratic government acting under a majority decision rule also has an incentive to provide too few collective goods. The reason, in brief, is that the political majority can impose taxes on all citizens—or disproportionate taxes on the political minority—and then reduce spending on collective goods, such as national defense, while increasing spending on private (i.e. noncollective) goods that benefit the majority (or members of the majority coalition) but not the minority. (Example: social security and agricultural subsidy)

Smith’s economic insight is to see that self-interest and capitalism do not generate social conflict. His analysis led him to see that self-interested individuals would mostly engage in win-win transactions—that the profit motive, property rights, divisions of labor, competition, and other features of capitalism would lead to individual prosperity and social harmony. But Smith retained the traditional ethical belief that the good of society as a whole is the moral standard of value.