Smith International Trade Theory

Adam Smith International Trade Theory

It is not Hume, North, Locke, the Physiocrats, nor any of the writers mentioned above, but Adam Smith who stands forth as the great critic of Mercantilism and the chief exponent of the doctrine of individual freedom in trade. It has often been said that there was more than coincidence in the fact that both the Declaration of Independence and The Wealth of Nations were given to the world in 1776. One was a declaration of political freedom, the other proclaimed industrial and commercial independence. Certainly strong ties bound the two together. Very little that Adam Smith said on the subject of trade was new, most of it had been said before; but the scope of Smith's work, the completeness of his analysis and the timeliness of its appearance all conspired to make The Wealth of Nations a landmark in economic thought.

The ideas expressed by Adam Smith on the subject of trade were rooted in his beliefs concerning the nature of man and society. Each man, he said, was more understanding than any other as to his own needs and desires. If each man were allowed to seek his own welfare, he would in the long run contribute most to the common good. Natural law, better than government restraint, would serve to prevent abuses of this freedom. It was self-interest, in the course of human history, which led to the subdivision of labor. The co-operation and exchange which naturally followed were responsible for the world's economic progress, and therein lay the road to future achievements.

It is obvious that Adam Smith favored free trade. Any restriction upon domestic or foreign commerce he believed unwise since it hampered the operation of natural law, and prevented the increase in benefits that further exchange would undoubtedly bring. A large part of The Wealth of Nations is devoted to an attack upon the principles of Mercantilism. That Smith's ideas of Mercantilism tended to exaggerate its evils is of small moment today. His work served to bring public confidence in the practices associated with mercantile policy to an end. He showed clearly how all forms of government interference whether the granting of monopolies, subsidizing exports, restricting imports, regulating wages, or the effort to acquire a stock of money hampered the natural growth of economic activity. It was, however, in his portrayal of the advantages of specialization by regions and nations that Smith secured his most general support. "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." Beginning with such reasoning, Smith showed how each nation would be far better off economically by concentrating on the thing it could do best, rather than following the Mercantilist doctrine of national self-sufficiency.

The new economic society which Smith proposed was to be regulated by competition. Economic privileges and monopolies were to be destroyed. Competition assured that each man and each nation would do the thing it was best fitted to do, and it assured each one the full reward of his services and the maximum contribution to the common good. One important function of government in relation to the business life of the community was to preserve competition.
Adam Smith's position on the question of government regulation was not absolute. He could be counted upon under most circumstances to defend free trade, but there were conditions which in his opinion required government action. For example, he did not believe that complete freedom in foreign trade could be achieved in England. He admitted that for political reasons the government might regulate trade. The Navigation Acts, requiring the use of English vessels to transport goods to and from England, Smith believed were necessary to safeguard the marine service as a matter of national defense. He was willing to compromise on the laws prohibiting the export of wool, accepting a tax instead of a full embargo. Although he disliked the use of counter restrictions in order to secure the reduction of barriers raised against English goods by foreign countries, he thought their use should be determined by the estimate of their success. Further departure from an absolute free trade position was apparent in Smith's suggestion that gradual steps should be used in restoring freedom to large industries heretofore maintained by government concessions, and that risky ventures from which the public would later benefit might be granted privileges of monopoly.

In spite of his defense of the laissez faire policy, Smith saw vast opportunities for a positive contribution by the government to its people. Necessary projects which were too large for private enterprise or for the voluntary efforts of a small section of the population should be undertaken by public authority. All institutions and works related to public defense, justice (especially the enforcement of contracts and the protection of property) were government business. He believed that education, licensing of professions and trades as a protection to the public, perhaps even the financial support of religious institutions, fell within the sphere of government action.

The effect of The Wealth of Nations on the thoughts and actions of the people was extraordinary. The ready acceptance of Smith's ideas seems to indicate that the people were waiting expectantly for his message even though the Napoleonic wars prevented direct application of these ideas to foreign trade for nearly forty years. As Eric Roll pointed out, Smith's analysis of trade gave businessmen a significant place in history, it justified their pursuit of profit, it gave them a social respectability as a class and identified them with great national destiny. In particular it voiced the ideas of many of them that opportunities for trade were practically unlimited, if legal restrictions and government privileges were removed. The Wealth of Nations simply removed obstructions and quickened a trend toward a new era in trade which was already well along but had thus far remained unobserved.