Economic Liberty and International Trade

Adam Smith, Economic Liberty and International Trade

The practical conclusion to which naturalism leads and to which Smith's optimism points is economic liberty. So naturally does it proceed from what we have just said that the reader finds himself quite prepared for Smith's celebrated phrases:
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.

As to the Government, or "sovereign," as Smith calls him, "he 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 interests of the society."

Smith, following the Physiocrats, but in a more comprehensive and scientific fashion, finds himself driven to the same conclusion, namely, the wisdom of non-intervention by the State in matters economic.

But here, as elsewhere in his work, the sense of the positive and the concrete, so remarkable in Smith, prevents his being content with a general demonstration. He is not satisfied with proving the ineffi­ciency of intervention as compared with the efficiency of those institu­tions which are spontaneously created by society itself, but he attempts to show that the State, by its very nature, is unfitted for economic functions. His arguments have been the arsenal from which the opponents of State intervention have been supplied with ammunition ever since.
Let us briefly recall them.

"No two characters seem more inconsistent than those of trader and sovereign." Governments are "always, and without any excep­tion, the greatest spendthrifts in the society." The reasons for this are numerous. In the first place, they employ money which has been gained by others, and one is always more prodigal of the wealth of others than of one's own. Moreover, the Government is too far removed from the centres of particular industries to give them that minute attention which they deserve if they are going to prosper.

The attention of the sovereign can be at best but a very general and vague consideration of what is likely to contribute to the better cultivation of the greater part of his dominions. The attention of the landlord is a particular and minute consideration of what is likely to be the most advantageous application of every inch of ground upon his estate.
This necessity for a thorough cultivation of the soil and for the best employment of capital, for direct and careful superintendence, is an idea to which he continually reverts. He regrets, among other things, that the growth of public debts causes a portion of the land and the national capital to pass into the hands of fund-holders, who are doubt­less interested in the good administration of a country, but "are not interested in the good condition of any particular portion of land, or in the good management of any particular portion of capital stock."

Lastly, the State is an inefficient administrator because its agents are negligent and thriftless, not being directly interested in adminis­tration, but paid out of public funds. Should the administration of the land pass into the hands of the State he exclaims that not a fourth of the present produce would ever be raised, because of "the negligent, expensive, and oppressive management of his factors and agents." On the contrary, he proposes that the remainder of the common land should be distributed among individuals. On this point European Governments have followed his advice somewhat too closely. For the same reason—the necessity for stimulating personal interest wherever possible—he commends, instead of a fixed salary for public officers, payment by those who benefit by their services, such payment in every case to be in strict proportion to the zeal and activity dis­played. This was to apply, for example, to judges and professors.

State administration is accordingly a pis aller, and intervention ought to be strictly limited to those cases in which individual action is impossible. Smith recognizes three functions only which the State can perform—namely, the administration of justice, defence.

and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence to any individual or small number of individuals, though it may fre­quently do much more than repay it to a great society.

We must beware, however, lest we exaggerate this point. Although Smith, in the majority of cases, preferred individual action, we must not conclude from this that he had unlimited confidence in individuals. Smith's individualism was of a particular kind. It was not a mere blind preference for every private enterprise, for he knew that industry frequently falls a prey to the spirit of monopoly. "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." In order that a private enterprise may be useful for the community two conditions are necessary. The entre­preneur must be: (i) actuated by personal interest; (2) his actions must by means of competition be kept within the limits of justice. Should either of these two conditions be wanting, the public would run the risk of losing as much by private as they would by State enterprise.

Thus Smith throughout remains very hostile to certain collective enterprises of a private nature, such as joint-stock companies, because of the absence of personal interest. The only exceptions which he would tolerate are banks, insurance companies, and companies formed for the construction or maintenance of canals or for supplying great towns with water, for the management of such undertakings can easily be reduced to a kind of routine, "or to such a uniformity of method as admits of little or no variation."

His opposition to every kind of monopoly granted either to an indi­vidual or to a company is even more pronounced. A whole chapter is devoted to an attack upon the great trading companies of the seventeenth and eighteenth centuries, which were created with a view to the development of colonial trade, and of which the East India Company was the most famous.
One other observation remains to be made. Non-intervention for Smith was a general principle, and not an absolute rule. He was no doctrinaire, and he never forgot that to every rule there are some exceptions. An interesting list could be made, giving all the cases in which, according to Smith, the legitimacy of State intervention was indisputable—legal limitation of interest, State administration of the post-office, compulsory elementary education, State examinations as a condition of entry into the liberal professions or to any post of confi­dence whatever, bank-notes of a minimum value of £5, etc. In a characteristic phrase he gave expression to his feeling on the question of restricting the liberty of banks.

Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole of society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical.

Despite these reservations it is still very evident that the whole of Smith's work is a plea for the economic freedom of the individual. It is an eloquent appeal against the Mercantilist policy and a violent attack upon every economic system inspired by it.

On this point there is absolute agreement between the work done by Smith in England and that carried on at the same time by the Physiocrats in France. Both in foreign and domestic trade producers, merchants, and workmen were hemmed in by a network of restrictions either inherited from the traditions of the Middle Ages or imposed by powerful party interests and upheld by false economic theories. The corporations still existed in the towns; although their regulations could not be applied to industries born after the passing of Elizabeth's famous law concerning apprenticeship. The Colbertian system, with its mob of officials entrusted with the task of superintending the processes of production, of examining the weight, the length, and the quality of the material employed, was still a grievance with the woollen manufacturers. The fixing of the duration of apprenticeship at seven years, the limitation of the number of apprentices in the principal industries, the obstacles put in the way of the mobility of labour by the Poor Law, and by the series of statutes passed since the reign of Elizabeth, fettered the movement of labour and the useful employ­ment of capital. Smith opposed these measures with the whole of his energy. England, unlike France, had fortunately escaped internal restrictions upon trade, but the restraints placed upon foreign trade still kept England and Ireland commercially separated. These checks upon foreign trade proved as irksome in England as they did every­where else. Manufactured goods from foreign countries were heavily taxed or were prohibited entrance altogether. Certain natural pro­ducts—e.g., French wine—were similarly handicapped; the importa­tion of a number of commodities necessary for national industry was banned; a narrow and oppressive policy regarded the colonies as the natural purveyors of raw materials for the mother-country and the willing buyers of its manufactured goods. Against all this mass of regulations, destined, it was thought, to secure the supremacy of England among other commercial nations, Smith directed his most spirited onslaughts. The fourth book of the Wealth of Nations is an eloquent and vigorous attack upon Mercantilism, admirable alike for the precision and the extent of its learning. It was this section of his work that interested his contemporaries most. For us it would have been the least interesting but for its theory of international trade and its criticism of Protection in general. On this account, however, it is of considerable importance in the study of economic doctrines.

In the struggle for Free Trade, as on other points, Smith was fore­stalled by the Physiocrats. But again has he shown himself superior in the breadth of his outlook. Physiocratic Liberalism was the result of their interest in agriculture, foreign trade being of quite secondary importance. Smith, on the other hand, considered foreign trade in itself advantageous, provided it began at the right moment and developed spontaneously. Although his point of view is far superior to that of the Physiocrats, even Smith failed to give us a satisfactory theory. It was reserved for Ricardo and his successors, particularly John Stuart Mill, to find a solid scientific basis for the theory of inter­national trade. The doctrine of the Scots economist is somewhat lame. But the hesitancy of a great writer is often interesting, and some of his arguments deserve to be recalled.
Already in our review of his theory of money we have become familiar with Smith's criticism of the balance of trade theory. But the balance of trade theory is not the whole of Protection, and we find in Smith something more than its mere refutation. In the first place, we have a criticism of Protectionism in general considered in its Mercantilistic aspect, followed by an attempt to demonstrate the positive advantages of international commerce.

The first criticism that he offers might be summed up in the well-known phrase: "Industry is limited by capital." "The general industry of the society can never exceed what the capital of the society can employ." But Protection, perhaps, increases the quantity of capital? No, "for it can only divert a part of it into a direction into which it might not otherwise have gone." But the direction spon­taneously given to their capital by individuals is the most favourable to a country's industry. Has not Smith demonstrated this already?

Protection, consequently, is not merely useless; it may even prove injurious.

The argument does not appear decisive, especially when we recall the criticism of Smith's optimism given above. To borrow an ex­pression of M. Pareto, it is the maximum of ophelimity and not the maximum of utility that is realized by the capitalists under the action of personal interest.

A second and a more striking argument shows the absurdity of manufacturing a commodity in this country at a great expense when a similar commodity might be supplied by a foreign country at less cost. " 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. . . . What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom." It is foolish to grow grapes in hothouses in Scotland when better and cheaper can be got from Portugal or France. Everybody is convinced of that. But a similar stupidity prevails when we are hindered by tariffs from profiting by the natural advantages which foreign nations possess as compared with ourselves. All "the mean rapacity and the monopolizing spirit of merchants and manufacturers" was necessary to blind men to their true interests on this point. According to Smith, there exists a natural distribution of products among various countries, resulting in an advantage to all of them. It is Protection that hinders our sharing in the advantages. This is the principle known as the "territorial division of labour."

This is the best argument for Free Trade. Later on Ricardo and Mill were to think they had improved it by their theory of' compara­tive cost,' but they only managed to complicate it, and the most recent theories have returned to this original view. It is a strange thing that Smith himself did not adopt it, and when he wanted to demonstrate directly the advantages of international trade he became to some extent disloyal to his own doctrine.

The real and decisive argument in favour of free exchange turns upon a consideration of the consumer's interests. Increased utilities placed at his disposal mark the superiority of free exchange, or, as John Stuart Mill puts it, "the only direct advantage of foreign com­merce consists in the imports." With Smith this is the point of view developed least of all. True, he wrote that "consumption is the sole end and purpose of all production. But, in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer." This criticism, however, was placed at the end of his examination of the Mercantilist system in chapter viii of Book IV. It is not found in the first edition of the work, and was only added in the third.2
It is the point of view of the producer that Smith invariably adopts when attempting to illustrate the advantages of international trade.

Just now foreign trade seemed to afford a means of disposing of a country's surplus products, and this extension of the market, it was argued, would lead to further division of labour and increased produc­tivity.4 But one is led to ask why, instead of producing the superfluous goods which it must export, it does not produce those things which it is obliged to import.
Smith, being now desirous of showing that international trade necessarily benefits both countries, bases his argument upon the fact that the merchants in both countries must make a profit—i.e., get an additional exchange value, which must be added to the others. To this Ricardo justly replied that the profits of a merchant do not necessarily increase the sum of utilities possessed by any country.

Here again, in striking contrast with the attitude of the Physiocrats, Smith, despite himself, has championed his own adversaries. As yet he is not sufficiently rid of Mercantilist prejudice not to be concerned with the welfare of the producer, and in his great work we find excel­lent argument and debatable points of view placed side by side. It does not appear that he himself realized this incompatibility. An irresistible tide was sweeping everybody before it in the direction of a more liberal policy. It proved too powerful for his contemporaries, who were not concerned to give a careful consideration to every part of his thesis. Enough that they found in him an ardent champion of an attractive cause. We have already noticed more than once the hesitation which Smith displays when he comes to apply his principle, and we must again refer to it in this connexion.

Theoretically a champion of absolutely free exchange, he mitigates his belief in practice, and mentions an exception to his policy which seemed to him a mere matter of common sense.

To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is more unconquerable, the private interests of many individuals, irresistibly oppose it.

Facts have belied this prophecy, like many others. England of the nineteenth century succeeded in realizing this Utopia of free exchange —almost to perfection.

Without any illusion as to the future, his condemnation of the past was not altogether unqualified. He justified some of the acts that were inspired by Mercantilism. "The act of navigation is not favour­able to foreign commerce," said he; "as defence, however, is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all the commercial regulations of England." In another instance he justifies an import duty where a tax is levied upon goods similar to those imported. Here an import duty merely restores that normal state of competition which was upset by the imposition of the Excise. Retaliation as a means of securing the abolition of foreign duties is not altogether under his ban. And he finally admits that liberty is best introduced gradually into those countries in which in­dustry has long enjoyed Protection or where a great number of men are employed.

His practical conclusion is somewhat as follows: Instead of in­numerable taxes which hinder importation and hamper production, England ought to content herself with the establishment of a certain number of taxes of a purely fiscal character, placed upon commodities such as wine, alcohol, sugar, tobacco, cocoa. Such a system, though perfectly consonant with a great deal of free exchange, would yield abundant revenue to the Treasury, and would afford ample compensa­tion for the losses resulting from the introduction of Free Trade.

England has followed his advice, and her financial system is to-day founded on these bases. Few economists can boast of such a complete realization of their projects.