Here’s a letter to a young and quite fervent “national conservative”:
Thanks for your e-mail in response to my recent letter sent to National Review.
You write that I “miss Nate Hochman’s meaning when he said that Adam Smith’s argument for freedom of trade depends on investors preferring to invest domestically.” On your interpretation, Mr. Hochman “only pointed out that Smith understood [that] in his day with free trade the invisible hand was around to stop self-interested investors from abandoning the national economy. This was completely different from today where hyper-globalization incentivizes investors to invest wherever they can. The destructive results of this breakdown of the invisible hand are all around us, especially our persistent trade deficits.”
If your reading of Mr. Hochman’s interpretation of Adam Smith is correct then he – Mr. Hochman – is even more wrong about Smith and about trade than I take him to be.
It’s true that investment today flows more easily across the globe than it did in Smith’s day, which is perhaps what you mean by the vague and loaded term “hyper-globalization.” But it’s not true that America today is suffering from this global investment or that Smith, were he still alive, would worry about whatever differences separate global investment flows today from those of his era.
Remember, with his use in The Wealth of Nations of the term “invisible hand,” Smith meant to assure his readers that, contrary to mercantilist fears, a policy of free trade would not result in the home country being denied adequate amounts of capital. And so the U.S. trade deficits that you point to as evidence of the “breakdown of the invisible hand” are emphatically no such thing. Each year when the U.S. runs a trade deficit is a year when the U.S. is a net recipient of global investment funds. The reality, then, is that the invisible hand today, far from being broken down, is working for the home economy of us Americans especially well.
And that Smith wouldn’t have cared about increases since his time in the ease and attractiveness of investing abroad is made clear by the fact that he described the very notion of the balance of trade as “absurd.”
Here’s the bottom line: Regardless of what Mr. Hochman meant in his interpretation of Adam Smith, the context in which Smith used the term “invisible hand” combines with Smith’s larger case for a policy of unilateral free trade to make clear that Smith believed that the interests of the people of the home country are best and naturally promoted by a policy of free trade – that is, by a policy under which each investor, each business person, and each consumer is left free by government to make his or her commercial decisions in ways that each of these persons believes will best promote his or her own individual interests.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030