Normally I pay no attention to Muirgeo’s comments, as his understanding of economics is too weak to justify wasting my time to address his assertions and numerous misunderstandings. And that will continue to be my policy. I will, however, break that policy here to prevent Muirgeo from misrepresenting Adam Smith.
Commenting on Russ’s post on the logic of trade, Muirgeo favorably quotes Smith – apparently under the misapprehension that Smith shared Muirgeo’s uninformed views about trade. Here’s Muirgeo’s quotation of Smith, cut and pasted directly from Muirgeo’s comment:
“But a capital employed in the home trade, it has already been shown, necessarily puts into motion a greater quantity of domestic industry, and gives revenue and employment to a greater number of inhabitants of the country, than an equal capital employed in the foreign trade company;”
First, and least importantly, the quotation is inaccurate. Where Muirgeo has Adam Smith ending this quotation with “foreign trade company”, Smith actually ended this quotation with “foreign trade of consumption”. We need not pause to ponder the difference in meaning, but only to point out that perhaps Muirgeo did not read Smith in the original but, instead, pulled this quotation from one of the many sites or pundits who are fond of citing this passage (from Book IV, Chapter 2, of The Wealth of Nations) to suggest that Smith wasn’t really a free trader.
Second, the passage, in context, is perfectly unobjectionable. If U.S.-based Acme Corp. spends $1M setting up a plant or warehouse in Botswana, that $1M obviously “puts into motion” more industry in Botswana than it does in America – or, said differently, the $1M invested in Botswana “puts into motion” less industry in America than it would have had it been used to build the plant or warehouse in the U.S.
But because increasing trade with Botswana enables Americans now to rely upon Botswanans to produce items that would otherwise have been produced in the U.S., capital – and an amount of labor and other resources in the U.S. – is now freed-up to be invested elsewhere in America. This investment “puts into motion” a quantum of industry in the U.S. that (in Smith’s view) equals the quantum that would have been “put into motion” had the $1M not been invested in Botswana but, instead, in America.
Both countries gain because both Botswanans and Americans are now more specialized; total output is now higher than it would be were there no commercial relations between Americans and Botswanans.
Third, let’s read on in Smith after the quotation cited by Muirgeo. Just four paragraphs later, here’s what Smith says:
What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.
To give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful. It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbours, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for.
What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished, no more than that of the above-mentioned artificers; but only left to find out the way in which it can be employed with the greatest advantage. It is certainly not employed to the greatest advantage when it is thus directed towards an object which it can buy cheaper than it can make. The value of its annual produce is certainly more or less diminished when it is thus turned away from producing commodities evidently of more value than the commodity which it is directed to produce. According to the supposition, that commodity could be purchased from foreign countries cheaper than it can be made at home. It could, therefore, have been purchased with a part only of the commodities, or, what is the same thing, with a part only of the price of the commodities, which the industry employed by an equal capital would have produced at home, had it been left to follow its natural course. The industry of the country, therefore, is thus turned away from a more to a less advantageous employment, and the exchangeable value of its annual produce, instead of being increased, according to the intention of the lawgiver, must necessarily be diminished by every such regulation.
By means of such regulations, indeed, a particular manufacture may sometimes be acquired sooner than it could have been otherwise, and after a certain time may be made at home as cheap or cheaper than in the foreign country. But though the industry of the society may be thus carried with advantage into a particular channel sooner than it could have been otherwise, it will by no means follow that the sum total, either of its industry, or of its revenue, can ever be augmented by any such regulation. The industry of the society can augment only in proportion as its capital augments, and its capital can augment only in proportion to what can be gradually saved out of its revenue. But the immediate effect of every such regulation is to diminish its revenue, and what diminishes its revenue is certainly not very likely to augment its capital faster than it would have augmented of its own accord had both capital and industry been left to find out their natural employments.