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Government's role in economy and society is constantly debated. Views range from that of anarchists, who believe in no government, to that of totalitarian socialists, who believe in complete state control of economy and society. Most people adopt a view somewhere between these extremes, yet even moderate views may differ vastly.
For more than half of U.S. history, government's role in the United States and other developed countries was relatively minor. Taxes and expenditures as a percentage of aggregate economic output were small, and regulations were few.1 This role began to change significantly in the late nineteenth century, as Germany instituted the first elements of the welfare state. Since that time, even countries that avoided the extremes of fascism and socialism have adopted a more expansive role for government. In developed Western democracies, governments have advanced the welfare state through a host of programs, such as public education, government-provided or -funded health care, and old-age pensions. Government taxing and spending as a percentage of aggregate output have risen, and regulations of the private economy are now numerous and complex.2
In this article, we do not take a position on what the state's role should be. Our aim is simpler and more objective. We first examine the roles Adam Smith advocated in his classic book An Inquiry into the Nature and Causes of the Wealth of Nations ([1776] 1976). Smith believed that government's proper roles in society should be limited, but well defined: government should provide national defense, the administration of justice, and public goods. In other words, it should protect citizens from external and internal aggression and supply goods that the free market may not provide.
After carefully considering Smith's writings in this essay, we compare the contemporary roles played by the U.S. government to the roles Smith envisioned. Examining government expenditures over time, we find that carrying out the roles Smith advocated has come to account for an increasingly smaller share of total government spending and that expanding the social-welfare state in the form of transfer payments has taken up an increasingly larger share of total government spending. This trend is evident at national, state, and local levels of government.
We turn next to a consideration of the consequences of an ever-expanding welfare state,...