In Adam Smith’s titular book, An Inquiry into the Nature and Causes of the Wealth of Nations, he argues for foreign trade against the dominant Mercantilist views of the time. Their views, in Smith’s words, were “to diminish as much as possible the importation of foreign goods for home consumption, and to increase as much as possible the exportation of the produce of domestic industry.” (IV.1.35) We explore how Smith argued that free trade in the international market was critical for economic growth and wealth increases through the expansion of the available market and how this criticized earlier writer’s definition of a public good.
First, we examine how mercantilist import restrictions and/or export subsidies can swing wealth and revenue both positively and negatively, not just for individual merchants, but for the economy (IV.1.45). The way these policies are implemented can very quickly change a merchant’s ability to make a profit on the goods he tries to export or import. In my opinion, this can make the merchant wary of conducting all his business in this sector if he could suddenly lose that source of income. At the time, a man was the sole breadwinner for his family, so a loss of income would have devastating effects on the economy if due to an import restriction a whole sector of the economy no longer had any money to spend thus hurting the economy. Smith thought there was little reason to implement policies as “the exportation of gold and silver in order to purchase foreign goods, did not always diminish the quantity of those metals in the kingdom.” (IV.1.7) this was the primary concern of the Mercantilists, but Smith found that it was quite the contrary that it would generally increase the quantity. Interestingly enough, nowadays we put all kinds of restrictions on imports and exports of some industries to help protect some of our domestic industries. For example, Canada has limits on the amount of Atlantic Salmon that can be exported, this isn’t because Canada thinks that foreign trade is bad, but rather to protect the fish so we don’t wipe out an entire population in a year, leaving more fish to be exported in the future, and by extension more money to be made.
Smith also argued that the freer foreign trade we have, the richer a country becomes, contrary to what “pretended doctors of this system” (IV.3.43) believed, they thought opening foreign trade would cause an unfavorable balance of trade (IV.3.43). Smith argued that the evidence suggests the complete opposite, that in fact “instead of being ruined by this free trade, as the principles of the commercial system would lead us to expect, have been enriched by it (IV.3.43). Basically saying that the past writers and “experts” on trade are wrong and thus have been limiting economic growth for the country. They were so concerned with money that they couldn’t see that sending some of that money abroad in exchange for goods can have a positive effect and is integral for the growth of a nation. Earlier in the book Smith said “if a nation could be separated from all the world, it would be of no consequence how much, or how little money circulated in it (IV.1.4), so if nations don’t open themselves up to foreign trade, money is essentially worthless. This argument of Smith’s was the most applicable at the time as there was already proof of it before writing of the book. A lot of Smith’s ideas were brand new at the time and took years to finally be seen in practice, but this small point in his book was already established, Smith just opened the eyes of the world to the proof that was right under their noses.
Finally, we look at Smith’s most important argument, that of the “invisible hand” the unobservable market force that helps the demand and supply of goods in a free market to automatically reach equilibrium. According to Smith “Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command” (IV.2.4). Meaning, if a consumer can buy a good for less capital from another country, then, they logically are going to want to buy the foreign good, so they will only have to invest a part of the capital they would need to buy the product domestically. Thus leaving them with more capital in the end. This is a natural decision we make, it goes all the way back to our ancient ancestors having to make decisions based on the most efficient use of their energy. The main difference is that we have replaced our energy expenditure with money in the equation. Smith argued that national income of a country goes down when the government intervenes and that the only real way for wealth to grow comes from individual savings, so this would decrease individual savings and thus hurt growth of wealth and the economy (IV.2.13) This makes total sense, it also completely goes against the mercantilist’s views of foreign trade and if they had their way and imposed these restrictions to foreign trade it would most certainly hurt national income, which is a very good reason to follow Smith in his argument against restrictions on foreign trade.
Adam Smith and the Mercantilist’s views are totally opposite, as stated in the introduction, the Mercantilist’s wanted as little importation as possible (IV.1.35), but Smith argued we needed as much importation as possible to help foster economic and wealth growth (IV.3.43). I think their differences come down to their differing views on what a public good is, namely trade. Smith thinks that trade should be a public good to help foster growth, but the Mercantilist’s believed it was not a public good, and thus they can control how trade is done, from how much trade can be conducted in any industry, to how costly it can be for the merchants whose lives depend on it. All of Smith’s arguments in the book criticize the Mercantilist’s views, systematically proving their points wrong, as a reflection of their differences in the definition of a public good. It’s almost like evolution, where past iterations that aren’t at the peak, get left behind in the dust, leaving the new idea to bloom and grow to the top.
In conclusion, Adam Smith’s arguments against restrictions on foreign trade can be summarized by the statement, foreign trade is critical to the promotion of economic growth and increase of wealth in any nation, and governments must be extremely careful when deciding to intervene as restrictions on even a single industry can have effects felt throughout the government. Smith’s ideas were brilliant and revolutionary at the time and still are to this day. It is my belief that his thinking on foreign trade no doubt shaped modern economics, and the economic growth of countries around the world.