Studying the Wealth of Nations (Part 10)

Public Works, Private Incentives, and the Limits of Government Provision

This is the tenth part of a weekly project marking the 250th anniversary of Adam Smith’s Wealth of Nations. You can find the ninth installment here.

In Book V, Adam Smith turns to one of the few areas where he appears to grant a clear role for government. Alongside national defense and the administration of justice, he includes a third duty: the provision of certain public works.

Roads, bridges, canals, and harbors, he argues, are often necessary for facilitating commerce. Without them, the extent of the market is constrained.

He also addresses how these public works ought to be financed, stating that they should be paid for with user fees. But this raises a more difficult question. If these works can be funded and maintained by user fees, why are they the responsibility of government at all?

Smith’s answer is not always consistent. In some cases, he relies on private incentives. In others, he dismisses them too quickly. The result is a theory of public works that is more coherent in its principles than in its conclusions.

When Public Works Are Justified

Smith begins with a clear criterion for when public provision may be necessary. Certain works, he argues, are so costly that no individual—or even small group—could expect to recover their expense through profit:

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 expence to any individual or small number of individuals…

This is the core of his argument: public works are justified not simply because they are useful, but because they cannot be profitably supplied. The question, then, is whether that assumption is correct.

Smith then turns to a more concrete observation: as commerce expands, so too does the need for infrastructure to support it.

The expence of making and maintaining the public roads of any country must evidently increase with the annual produce of the land and labour of that country… The strength of a bridge must be suited to the number and weight of the carriages which are likely to pass over it.

Infrastructure, in this sense, is not arbitrary. It follows commerce. As the volume of trade increases, so does the demand for roads, bridges, and canals capable of sustaining it.

From this, Smith draws a narrower conclusion than is often assumed. These works are justified not because they are public, but because they reduce the cost of exchange. Their role is to expand the market by lowering the cost of moving goods within it.

Who Should Pay

While Smith allows for public works, he is far more restrictive about how they should be funded.

It does not seem necessary that the expence of those public works should be defrayed from that public revenue… The greater part of such public works may easily be so managed as to afford a particular revenue sufficient for defraying their own expence…

His principle is consistent: those who benefit should pay.

A highway… may… be made and maintained by a small toll… a harbour, by a moderate port-duty… The post-office… affords… a very considerable revenue to the sovereign.

These fees do more than raise revenue. They align payment with use. Those who impose the greatest wear and tear pay the most, and those who benefit most from the infrastructure bear its cost.

When the carriages… pay toll in proportion to their weight… they pay… in proportion to the wear and tear… It seems scarce possible to invent a more equitable way…

Just as importantly, user fees discipline investment. Works are built where they are needed and scaled to what commerce can sustain.

They can be made only where that commerce requires them… A great bridge cannot be thrown over a river at a place where nobody passes…

Where Smith’s Argument Breaks

But if these projects can be “made and maintained” through user fees, it raises a deeper question: why are they a duty of government at all?

Smith himself acknowledges that some of these works can be privately provided. Navigable canals, for instance:

In several different parts of Europe the ton or lock-duty upon a canal is the property of private persons, whose private interest obliges them to keep up the canal. If it is not kept in tolerable order, the navigation necessarily ceases altogether, and along with it the whole profit which they can make by the tolls.

In other words, even within his own framework, some “public works” can be reliably provided through private incentives.

But when he turns to roads, Smith abandons this logic. He argues that roads cannot “with any safety” be entrusted to private operators because they remain usable even when poorly maintained, allowing tolls to be collected without corresponding upkeep.

The concern is real—but it is not unique to private provision. It is a problem of weak competition and poorly defined incentives, not ownership itself.

Local Road Monopolies

Some background is in order.

Prior to the 17th century, Great Britain’s roads were maintained by local governments, known as parishes. As trade expanded, however, road quality became an issue, particularly with the use of large wagons. Financing mechanisms were limited: statute labor required unpaid work from residents, and property taxes were capped.

In response, Parliament authorized the creation of turnpike trusts—local entities with the authority to levy tolls and issue bonds. These trusts, often composed of local elites, effectively created a form of controlled monopoly over road provision.

Smith himself noted the resulting problems: high tolls, poor maintenance, and what he described as a “slovenly” approach to upkeep.

What Smith treats as a failure of private provision is more accurately a failure of competitive conditions—comparable to modern American utility monopolies.

A private system would differ in one crucial respect: it would allow for competition.

If a road proprietor charged high tolls while neglecting maintenance, adjacent landowners would have an incentive to build competing routes. Even if entry were costly, the possibility of competition would discipline pricing and quality.

More importantly, competition would not be limited to new entrants. Existing roads already competed along trade routes. Merchants, observing differences in tolls and road quality, would choose the most profitable paths. Poorly maintained roads would lose traffic; well-maintained roads would gain it. The proprietor of a well-maintained road would hear reports of poorly maintained roads elsewhere, alerting him to profit opportunities.

Public Works Without Public Provision

Smith’s discussion of public works is often read as a justification for government provision. But read more closely, it points to a different conclusion.

He consistently favors pricing tied to use, funding tied to beneficiaries, and administration tied to those with a stake in outcomes. These are not uniquely public principles. They are the same principles that govern successful private markets.

The tension in his argument arises when he departs from those principles. Where incentives are clear and competition is possible—as with canals—he trusts private provision. Where they appear weaker—as with roads—he defaults to public administration, without fully considering how institutions might restore those incentives.

The result is an incomplete argument. Smith identifies real coordination problems, but he does not fully explore how profit, property rights, and competition might solve them.

The question, then, is not whether public works are necessary. It is whether they must be public.

And in many cases—even in Smith’s own time—the answer was no.