Pardon the length of this letter, but given that it’s mostly quotations from Adam Smith, it should be a joy to read.
Mr. W__:
Persuaded that Oren Cass is correct to argue that, as you put it, “Adam Smith[] was not a knee jerk free trade promoter,” you seek my reaction to Oren’s argument.
No serious scholar ever accused Adam Smith’s knee of jerking in advocacy of any policy. Smith developed his case for a policy of unilateral free trade with great care, knowledge, reflection, and wisdom. Further, he explicitly offered exceptions to his case for free trade. (I write about these exceptions here.) But it’s wrong to conclude that the exceptions Smith mentioned overwhelm his underlying case for free trade. Anyone who reads The Wealth of Nations in its entirety understands that Smith was deeply suspicious of economic nationalism generally, and of protectionism specifically. This reader therefore understands that Smith would look with immense disfavor upon Oren’s case for a policy of a “bounded market.”
And so I suspect that Oren hasn’t read The Wealth of Nations in its entirety. Were he to do so, he’d realize the error of his assertion that Smith favored free trade only “only so long as a nation’s capitalists invested within its own borders.” Oren’s claim here is simply and fully mistaken. (My colleague Dan Klein is working on an essay that further exposes this error.)
My student Jon Murphy correctly notes that danger lurks in reading only quotations from Adam Smith; Smith’s entire corpus should be read. Nevertheless, The Wealth of Nations alone does contain more than enough quotable passages to reveal that Oren errs in suggesting that Smith (1) supported free trade only insofar as capitalists invest domestically, (2) believed that free trade is desirable only if it doesn’t result in trade ‘imbalances,’ and (3) would have supported industrial policy. Here are some of those passages:
The balance of produce and consumption may be constantly in favour of a nation, though what is called the balance of trade be generally against it. A nation may import to a greater value than it exports for half a century, perhaps, together; the gold and silver which comes into it during an this time may be all immediately sent out of it; its circulating coin may gradually decay, different sorts of paper money being substituted in its place, and even the debts, too, which it contracts in the principal nations with whom it deals, may be gradually increasing; and yet its real wealth, the exchangeable value of the annual produce of its lands and labour, may, during the same period, have been increasing in a much greater proportion. The state of our North American colonies, and of the trade which they carried on with Great Britain, before the commencement of the present disturbances, may serve as a proof that this is by no means an impossible supposition.[Book IV, Chapter 3]
…..
Nothing, however, can be more absurd than this whole doctrine of the balance of trade. [Book IV, Chapter 3]
…..
All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society. [Book IV, Chapter 9]
…..
Were all nations to follow the liberal system of free exportation and free importation, the different states into which a great continent was divided would so far resemble the different provinces of a great empire. As among the different provinces of a great empire the freedom of the inland trade appears, both from reason and experience, not only the best palliative of a dearth, but the most effectual preventative of a famine; so would the freedom of the exportation and importation trade be among the different states into which a great continent was divided. The larger the continent, the easier the communication through all the different parts of it, both by land and by water, the less would any one particular part of it ever be exposed to either of these calamities, the scarcity of any one country being more likely to be relieved by the plenty of some other. [Book IV, Chapter 5]
…..
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. [Book IV, Chapter 2]
There’s more – much more – from Adam Smith along these lines. But the above quotations are sufficient to prove that this great Scot would have looked with scorn upon attempts by government to engineer a “bounded market.”
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
