Adam Smith’s Soft Side
Was Adam Smith more in favor of government intervention than previously thought?
As Adam Smith wrote in his 18th century book, “The Wealth of Nations,” “When the regulation is in support of the workman, it is always just and equitable — but it is sometimes otherwise when in favour of the masters.”
The distinguished American economist John Kenneth Galbraith said about “The Wealth of Nations:” "It is much celebrated by the ministry of the righteous right, few of whom have read it.
"Were they to do so — disapproval of the corporate form, approval of a wealth tax — they would be greatly shocked."
Throughout his life, Smith recognized and understood the goals of the elite.
The elite's interest, he wrote, "is never exactly the same with that of the public, who [the elite] have generally an interest to deceive — and even to oppress — the public and who accordingly have, upon many occasions, both deceived and oppressed it."
He advocated high wages as beneficial to employer and employee alike, and he advocated the abolition of slavery because "the work done by free men comes cheaper in the end than that performed by slaves."
He took this view not so much because of a fear of revolt, but because generally satisfied well-paid workers would create wealth in a society and increase purchasing power for the domestic economy.
"No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable."
Likewise, Adam Smith's support of free trade seemed contingent on several things. He supported the Acts of Trade and Navigation, requiring British goods to be sent on British ships manned by British sailors.
He believed that tariffs serve a useful purpose. He expressed caution when a nation contemplates lowering tariffs, for an immediate and precipitous reduction could throw large numbers of people out of work.
And he expressed little caution about temporary retaliatory tariffs when one nation had erected major barriers against another to harm that nation.
"The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods," he wrote.
Economic historians and less-learned editorial writers seem to have forgotten that Smith — in foreign trade as in the domestic economy — believed that his invisible hand could do great harm to a nation and its citizens "unless government takes great pains to prevent it."
Two hundred years later, Adam Smith's invisible hand would guide an economy driven by consumer behavior — occasionally regulated by government — and measured by its consumption and ever-growing standard of living.
Low prices mattered. Comparative advantage — British economist David Ricardo's theory by which the lowest-cost producer should produce and sell — mattered. The buyer always stood paramount.
And society's success was a product of the degree and quantity of purchase. But neither Smith nor Ricardo foresaw the mobility of capital.
They expected capital to remain in the home country, while goods would be produced according to the law of comparative advantage.
German economist Friedrich List, on the other hand, saw a different world, a world where a society's success is defined more by what it could produce than by what it consumed. What is good for consumers today is not necessarily what is good for the country long term.
"The forces of production are the tree on which wealth grows. The tree which bears the fruit is of itself of greater value than the fruit itself," List wrote in his seminal 1841 work “The National System of Political Economy.”
A nation is not measured by its wealth and its purchasing power, but "in the proportion in which it has more developed its powers of production."
National interest, List said, should take precedence over cheap consumer goods purchased from a foreign power. Why, he asked, were European powers able to rule and colonize Asia, Africa and Latin America?
The less-developed countries were not able to make the tools and weapons and machines that they needed. In List's view, it was not a question of right or wrong, it was simply a question of weak or strong, and he wanted his nation strong.
Other great economic thinkers throughout history have also strongly opposed unrestricted free trade.
As John Maynard Keynes wrote, "Ideas, knowledge, art, hospitality, travel — these are the things which should of their nature be international.
“But let goods be homespun whenever it is reasonably and conveniently possible, and above all, let finance be primarily national."
Free trade should never override local customs, laws, environmental protection and local rights. National interest also mattered a great deal to Adam Smith.
Regulation of the invisible hand and direction from the government — especially in the areas of commercial navigation, national security and military preparedness — were of paramount importance.
Smith argued that investment at home produces "more revenue and employment" than investment in foreign trade.
"By preferring the support of domestic to that of foreign investment, [the capitalist] intends only his own security — and by directing that industry in such a manner as its produce what may be of the greatest value, he intends only his own gain, and he is in this, as in many other issues, led by an invisible hand to promote an end which was no part of his intention."
Four score and some years later, Abraham Lincoln echoed Smith's assertion: "Abandonment of the protective policy by the American Government must result in the increase of both useless labor, and idleness — and so, in proportion must produce want and ruin among our people."
Smith was most opposed to mercantilism. He saw merchants set up large corporate monopolies like the East India Company.
He seemed to be a free trader sometimes and an anti-free trader other times.
But he was never a mercantilist. "The government of an exclusive company is perhaps the worst of all governments for any country whatever."
In the last 12 years of his life, Smith, as if to convince history of his true sentiments, worked as a commissioner of customs in Edinburgh, a job which charged him with "obstructing imports into Scotland" and enforcing Great Britain's protectionist trade policy, mostly aimed at the fledgling, new country across the Atlantic.
"To expect that freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or a Utopia should ever be established in it," he told succeeding generations.
Adapted from the book “Myths of Free Trade: Why American Trade Policy Has Failed” by Sherrod Brown, copyright © 2004. Reprinted by arrangement with The New Press.