In the end, Adam Smith caused all economic thinkers to attend to the natural metrics of free trade. This has equally led to the emergence of the vital concept of liberty and that led directly to a fresh development protocol we call democracy. Free trade demands free exchange which demands empowering the Demos.
The true danger to all this has been external intervention such as flooding a local market with cheap goods in order to produce a financial monopoly. That was not so apparent in the time of Adam smith.
I think that the solution to all that is to establish a ten percent rule in which a new competitor is allowed to enter a market on a ten percent Per year rate unless all agree to an alternative. This sets rules of engagement that promotes adjustment and recapitalization.
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The Timeless Wisdom of Adam Smith
Saturday, December 17, 2016
https://fee.org/articles/the-timeless-wisdom-of-adam-smith/
Adam Smith’s central contribution to economic understanding was
surely his demonstration that under an institutional arrangement of
individual liberty, property rights, and voluntary exchange the
self-interested conduct of market participants could be shown to be
consistent with a general betterment of the human condition.
The emergence of a social system of division of labor makes men
interdependent for the necessities, amenities and luxuries of life. But
in the free, competitive market order every individual can only access
what others in society can supply him with by offering them something in
exchange that they value more highly than what is being asked from them
in trade.
Thus, as Adam Smith memorably explained, as if by an “invisible hand”
each individual is guided to apply his knowledge, ability and talents
in ways that serve the trading desires of others as the means of
fulfilling his own self-interested goals and purposes. Furthermore, not
only is the need for government regulation and control of economic
affairs shown to be unnecessary for societal improvement, Smith went on
to argue that such government intervention was detrimental to the most
successful advancements in human material and cultural life. (See, my
article, “Adam Smith’s Air of Paradox”.)
Individual Freedom and Trade Among Nations
At the heart of Adam Smith’s criticisms of eighteenth century
Mercantilism, with its presumption of a need for political direction and
planning of economic activities for balance and prosperity, was his
insistence that such political paternalism was needed neither in
domestic trade and commerce nor in the buying and selling of imports and
exports between countries.
If domestic produce can be bought as cheaply
as that of foreign industry, regulation is evidently useless. If it
cannot, it must generally be hurtful.
Adam Smith argued that it was superfluous and counter-productive for
government to attempt to manage and direct the importing or exporting of
goods and services to maintain a presumed “favorable” balance of trade.
Each individual tries to minimize the costs that must be incurred in
achieving his goals and ends. He only makes at home what is less
expensive to make than to buy from others. And he buys desired goods
from others only when those others can provide them at a lower cost in
resources and labor and time, than if the individual attempted to
produce those desired goods through his own self-sufficient efforts.
Thus, goods are purchased from producers in other countries only when
they can offer them at a lower cost than manufacturing them in one’s
own country. And, in turn, one purchases those foreign produced goods by
supplying the foreign seller with some good or service at a lower cost
than if he tried to produce it in his own land.
When governments, through regulations and controls, force a product
to be produced at home that could be less expensively purchased from
abroad, it is misdirecting scarce resources and labor into wasteful and
inefficient uses. The result must be that the wealth of that nation –
and the material wellbeing of its citizens -- is reduced by the amount
by which more resources and labor must be devoted to making wanted goods
than they could be obtained through a free system of international
division of labor and peaceful, mutually beneficial exchange. Hence, it
is more prudent for the prosperity of one’s own nation to leave
production and trade to the self-interested actions of its individual
citizens.
As Adam Smith explained in The Wealth of Nations (1776):
“To give the monopoly of the home-market to the produce of domestic
industry, in any particular art or manufacture, is in some measure to
direct private people in what manner they ought to employ their
capitals, and must, in almost all cases, be either a useless or a
hurtful regulation. If the produce of domestic can be bought there as
cheap as that of foreign industry, the regulation is evidently useless.
If it cannot, it must generally be hurtful.
“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.
The tailor does not attempt to make his own shoes, but buys them of the
shoemaker. The shoemaker does not attempt to make his own clothes, but
employs a tailor. The farmer attempts to make neither the one nor the
other, but employs those different artificers.
“All of them find it for their interest to employ their whole
industry in a way in which they have some advantage over their
neighbors, and to purchase with a part of its produce, or what is the
same thing, with the price of a part of it, whatever else they have
occasion for.
“What is prudence in the conduct of every private family can scarce
be folly in that of a great kingdom. If a foreign country can supply us
with a commodity cheaper than we ourselves can make it, better to buy it
of them with some part of the produce of our own industry, employed in a
way in which we have some advantage . . .
“It is certainly not employed to the greatest advantage when it is
directed towards an object which it can buy cheaper than it can make it .
. . The Industry of a country, therefore, is thus turned away from a
more, to a less advantageous employment, and the exchangeable value of
its annual produce, instead of being increased, according to the
intention of the lawgiver, must necessarily be diminished by every such
regulation.”
All that was necessary, Adam Smith argued, was to leave men free to
follow their own self-interests, and production and prosperity will be
forthcoming in the directions and forms most advantageous to the members
of the society as a whole, whether that trade is geared toward domestic
or foreign demand and supply.
The Propagating of False Notions of Conflict Among Nations
Who were often the instigators for and beneficiaries of trade
restrictions on imports and subsidies for exports? Adam Smith was
scathing in his criticisms of manufacturers, merchants and agricultural
special interests who wished to maintain or gain market share and
greater profits from restricting the free flow of goods and services
between countries through government action.
Those who today are usually labeled “crony capitalists” run to the
government for favors, privileges, and protections from foreign and
domestic competition, Adam Smith warned. Toward that end, they
popularize fallacies and misunderstanding concerning the mutual benefits
of trade among nations. Said Smith:
“Commerce, which ought naturally to be, among nations, as among
individuals, a bond of union and friendship, has become the most fertile
source of discord and animosity. The capricious ambition of kings and
ministers has not, during the present and the preceding century, been
more fatal to the repose of Europe, than the impertinent jealousy of
merchants and manufacturers.
“The violence and injustice of the rulers of mankind is an ancient
evil, for which I am afraid, the nature of human affairs can scarce
admit of remedy. But the mean rapacity, the monopolizing spirit of
merchants and manufacturers, who neither are, nor ought to be, the
rulers of mankind, though it cannot perhaps be corrected, may very
easily be prevented from disturbing the tranquility of any body but
themselves.”
Smith warned of the “interested sophistry” of those desiring
anti-competitive interventions and protections in the private sector
through the political power of governments by creating false notions
that trade is a zero-sum game in which if one side wins the other side
must have lost, or that imports and a trade deficit are inherently
harmful to the material well-being of a nation. These distortions and
errors had to be refuted so it would be better understood that, “In
every country it always is and must be in the interest of the great body
of the people to buy whatever they want of those who sell it cheapest.”
The Mutual Prosperity of Nations is Beneficial to All
In addition, the material success of existing or potential trading
partners is never a threat to the well being of one’s own nation. To the
contrary, the more prosperous other nations may be, the greater the
trading opportunities for selling one’s own specialized output as the
means to acquiring the true benefit of trade – the obtaining of imports
that foreign suppliers can make available at lower costs and better
qualities and varieties than if one had to rely simply on one’s own
nation’s labor skills and resources. “A nation that would enrich itself
by foreign trade,” Adam Smith said, “is certainly most likely to do so
when its neighbors are all rich, industrious, and commercial nations.”
To try to impoverish other nations is a sure way to undermine one’s own
nation’s rise to improved prosperity.
Abolishing Trade Restrictions for Prosperity and Against Privilege
The best means of assuring access to the benefits from international
trade and to weaken, if not fully eliminate, the influence of those
private interest groups wishing to use the government for their own ends
at the expense of the remainder of society was to abolish in the most
expeditious manner all barriers to a freedom of trade among nations.
Within one lifetime after Adam Smith's death, Great Britain abolished virtually all its domestic and foreign trade restrictions.
There were a number of exceptions and circumstances in which Adam
Smith accepted government intervention in the patterns of trade. And he
argued that when industries have long been secure behind trade barriers
that have provided them with monopoly positions, to prevent severe
disruption to the economic circumstances to those employed in these
sectors of the economy it might be desirable to reduce the trade
barriers gradually rather than all at once.
But he also emphasized that even if freedom of trade was established
in short order, the displacement of even a significant number of workers
would soon be remedied with alternative employments, as the economic
gains from being able to purchase a variety of less expensive goods from
aboard would provide the financial means for demanding many goods that
previously consumers could not afford at the prior protected monopoly
prices. Or as Smith more generally expressed it:
“The natural effort of every individual to better his own conditions,
when suffered to exert itself with freedom and security, is so powerful
a principle, that it is alone, and without assistance, not only capable
of carrying on the society to wealth and prosperity, but of surmounting
a hundred impertinent obstructions with which the folly of human laws
too often encumber its operations.”
The Prejudices of the Public and the Power of the Interests
In spite of the cogency and convincingness of his arguments against
Mercantilism, Adam Smith was far from confident that his ideas and those
of others like him would ever succeed in bringing about the end to this
eighteenth century version of central planning, and in its place the
establishment of a “system of natural liberty” with freedom of trade.
His pessimism was due to two influences and forces in society, he
said: The prejudices of the public – by which he meant the difficulty of
getting the ordinary citizen to understand the logic of the market and
the positive benefits from the “invisible hand” of unintended
consequences. And the power of the interests – by which he meant the
special interest groups that benefit from government privileges and
favors, and who would resist any and all attempts to reduce or eliminate
government regulations and redistributions that benefit them at others’
expense.
In Adam Smith’s own words:
“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 much more
unconquerable, the private interests of many individuals, irresistibly
oppose it . . .The member of parliament who supports every proposal for
strengthening this monopoly, is sure to acquire not only the reputation
of understanding trade, but great popularity and influence with an order
of men whose numbers and wealth render them of great importance.
“If he opposes them, on the contrary, and still more if he has
authority enough to be able to thwart them, neither the most
acknowledged probity, nor the highest rank, nor the greatest public
service, can protect him from the most infamous abuse and detraction,
from personal insults, nor sometimes real danger, arising from the
insolent outrage of furious and disappointed monopolies.”
Fortunately for the material and cultural betterment of the world,
Adam Smith was wrong in this prediction. Within one lifetime between his
death in 1790 and the mid-1840s, Great Britain abolished virtually all
its domestic and foreign trade restrictions, putting in its place a
system of free enterprise and free trade. And through the Britain’s
example and success with highly unrestricted freedom of trade, many
other countries in Europe were influenced to follow the same course, if
perhaps not as radically as in Great Britain or in the United States.
Adam Smith, in other words, had underestimated the power of his own
ideas.
Commerce as a Pathway for Improving Civil Society
The benefits of commerce and trade, Adam Smith argued, were not only
the material improvements in man’s condition. It also served as a method
for civilizing men, if by civilization is meant, at least partly,
courtesy, and respect for others, and an allegiance to honesty and
fulfillment of promises.
When a person makes perhaps 20 contracts in a day, the very appearance of a cheat would make him lose.
When men deal with each other on a daily and regular basis, they soon
learn that their own wellbeing requires of them sensitivity for those
with whom they trade.
Losing the confidence or the trust of one’s trading partners can result in social and economic injury to oneself.
The self-interest that guides a man to demonstrate courtesy and
thoughtfulness for his customers, under the fear of losing their
business to some rival with superior manners or etiquette to his own,
tends over time to be internalized as habituated “proper behavior” to
others in general and in most circumstances. Through this process, the
other-orientedness that voluntary exchange requires of each individual
in his own self-interest, if he is to attain his own ends, fosters the
institutionalization of interpersonal conduct that is usually considered
essential to a well-mannered society and cultured civilization.
Adam Smith explained this important and fortuitous benefit from commercial society in his Lectures on Jurisprudence (1766):
“Whenever commerce is introduced into any country, probity and
punctuality always accompany it . . . It is far more reducible to
self-interest, that general principle which regulates the actions of
every man, and which leads men to act in a certain manner from views of
advantage, and is as deeply implanted in an Englishman as a Dutchman.
“A dealer is afraid of losing his character, and is scrupulous in
observing every engagement. When a person makes perhaps 20 contracts in a
day, he cannot gain so much by endeavoring to impose on his neighbors,
as the very appearance of a cheat would make him lose.
“When people seldom deal with one another, we find that they are
somewhat disposed to cheat, because they can gain more by a smart trick
than they can lose by the injury that it does to their character . . .
Wherever dealing are frequent, a man does not expect to gain so much by
any one contract as by probity and punctuality in the whole, and a
prudent dealer, who is sensible of his real interest, would rather
choose to lose what he has a right to than give any ground for suspicion
. . .
“When the greater part of people are merchants they always bring
probity and punctuality into fashion, and these therefore are the
principle virtues of a commercial nation.”
Commerce And the End of Feudalism
Adam Smith also explained how the spontaneous emergence of commerce
and opportunities for trade between foreign countries and faraway cities
with the countryside slowly reduced the power of feudal lords and
princes over those who lived and worked on their lands, thus setting in
motion the processes that began the development of civil society with
its more modern conceptions of individual rights and decentralized
power.
In the self-sufficient environment of the medieval Manor, the only or
primary source of needed necessities and luxuries desired by the Lord
of the Manor was the output of those on his estate and the immediate
village environment. The taxes and tithes that he received had no other
outlet for being spent than on the employment of the several hundred of
people over whom he ruled.
A revolution of the greatest importance to
the public happiness was brought about by people, who had not the least
intention to serve the public.
At the same time, the Lord’s expenditures represented for these
tenants on his land and for the village craftsman virtually all the
demand and income they might earn at any time. Thus, their obedience and
subservience to the Lord of the Manor was not only based on his
political authority and ownership of the land, but also because of their
total dependency on his good graces in spending his wealth on those
goods and services which they produced, partly to pay the taxes and
tithes which they owed the Lord.
But with the emergence of commerce and trade from outside the
confines of the Lord’s estate, he could now purchase desired goods from
beyond his own community. This weakened his hold of dependency and
obedience over those who lived and worked on his estate. At the same
time, a growing market outside the estate meant that those village
craftsmen and farming tenants now could find other markets for their
goods besides the Lord. This reduced their dependency on his good graces
and spending for their own survival and modest livelihood.
Adam Smith explained that this growing economic independence from the
Lord served as a crucial element in people beginning to sense their
freedom from his hold over them, and to demand formal liberty in their
relationships with political authority without the fear, anymore, of his
stranglehold over their material existence. In Adam Smith’s words in
The Wealth of Nations:
“In a country which has neither foreign commerce, nor any of the
finer manufactures, a great proprietor, having nothing for which he can
exchange the greater part of the produce of his lands which is over and
above the maintenance of the cultivators, consumes the whole in rustic
hospitality at home . . .
“He is at all times, therefore, surrounded with a multitude of
retainers and dependents, who . . . being fed entirely by his bounty,
must obey him, for the same reason that soldiers must obey the prince
who pays them . . . The occupiers on the land were in every respect as
dependent upon the great proprietor as his retainers . . . In a country
where the surplus of a large estate must be consumed upon the estate
itself . . . a tenant . . . is as dependent upon the proprietor as any
servant or retainer, whatever, and must obey him with as little reserve .
. .
“The silent and insensible operation of foreign commerce and
manufactures gradually . . . furnished the great proprietors with
something for which they could exchange the whole surplus of their
lands, and they could consume themselves without sharing it either with
tenants or retainers . . .
“When the great proprietors of land spent their rents in maintaining
their tenants and retainers, each of them maintains entirely his own
tenants and his own retainers. But when they spend them in maintaining
tradesmen and artificers, they may, all of them taken together, perhaps
maintain as great . . . or a greater number of people than before.
“Each of them, however, taken singly, contributes often but a very
small share to the maintenance of any individual of this greater number.
Each tradesman or artificer derives his subsistence from the
employment, not of one, but of a hundred or a thousand different
customers. Through in some measure obligated to them all, therefore, he
is not absolutely dependent upon any one of them.”
The slowly developing, but radical change in the relationships
between the Lords and the commoners was an example, Adam Smith said, of
those cases of human actions that transform society but are not
instances of any intentional human design.
“A revolution of the greatest importance to the public happiness was
in this manner brought about by two different orders of people, who had
not the least intention to serve the public.
“To gratify the most childish vanity was the sole motive of the great
proprietors . . . For a pair of diamond buckles perhaps, or something
as frivolous and useless, they exchanged the maintenance, or what is the
same thing, the price of the maintenance of a thousand men for a year,
and with it the whole weight and authority which it would give them.
“The merchants and artificers, much less ridiculous, acted merely
from a view to their own interest, and in pursuit of their own peddler
principle of turning a penny wherever a penny was to be got. Neither of
them had either knowledge or foresight of the great revolution which the
folly of the one, and the industry of the other, was gradually bringing
about.”
Prosperity, Independence and Freedom
John Miller, another Scottish philosopher who had been a student of
Adam Smith’s at the University of Glasgow, highlighted how this change
in relationships between the feudal lords and the commoner fostered the
spirit and the politics of liberty and democracy in his own book,
Origins of the Distinction of Ranks published in 1779, three years after
Smith’s Wealth of Nations appeared. Explained Miller:
“The further a nation advances in opulence and refinement, it has
occasion to employ a greater number of merchants, of tradesmen and
artificers; and as the lower people, in general, become thereby more
independent in their circumstances, they begin to exert those sentiments
of liberty which are natural to the mind of man . . .
“While, from these causes, people of the low rank are gradually
advancing towards a state of independence, the influence derived from
wealth is diminished in the same proportion . .
“Thus, while fewer persons are under the necessity of depending upon
him, he is daily rendered less capable of maintaining dependents; till
at last his domestics and servants are reduced to such as are merely
subservient to luxury and pageantry, but are of no use in supporting
authority . . .
“It cannot be doubted that these circumstances have a tendency to
introduce a democratical government. As persons of inferior rank are
placed in a situation which, in point of subsistence, renders them
little dependent upon their superiors; as no one order of men continues
in the exclusive possession of opulence; and as every man who is
industrious may entertain the hope of gaining a fortune; it is to be
expected that the prerogatives of the monarch, and of the ancient
nobility will be gradually undermined, that the privileges of the people
will be extended in the same proportion and that power, the usual
attendant of wealth, will be in some measure diffused over all the
members of the community.”
Adam Smith’s Contribution to the Cause of Liberty and Prosperity
Adam Smith’s significance cannot be overstated in formulating the
ideas and insights of that “system of natural liberty” that helped to
foster an understanding of the workings of the free market order and its
institutional prerequisites of individual freedom, private property,
voluntary association and unrestricted, peaceful competition. Or as the
prominent nineteenth century economist and popularizer of economic
ideas, John R. McCulloch, said in 1853, “Adam Smith has an
unquestionable claim to be regarded as the real founder of the modern
system of Political Economy . . .The Wealth of Nations must be placed in
the foremost rank of those works which have helped to liberalize,
enlighten, and enrich mankind.”
He brought together in The Wealth of Nations many of the ideas about
human nature, spontaneous order, competitive markets and more limited
government that had been part of the central themes of the Scottish
Moral Philosophers. Unique to Smith’s and the Scottish contribution in
general is also the insight that whatever degree of liberty that has
been acquired in the West has not been the result of a planned out
linear process originating from some articulated “first principle.”
Liberty, as we understand its meaning and content today, emerged to a
great extent as the unintended consequence of a series of unique
historical events in certain parts of Europe, the full meaning and
outcome of which the individual actors in this centuries-long drama
often have had little or no inkling of in terms of the implications
their own decisions and interactions were helping to bring about.
It should make us appreciative of the historical processes that have
fostered liberty, and modest in our too frequent arrogance that it is in
the power of some to remold men or remake society in some rarified
conception of a “better world,” all according to socially engineered
design. We do most for improving the conditions of mankind when we allow
each individual to be free to use his own knowledge and abilities as he
sees best in a setting in which market prices and competitive
incentives direct him in how to apply himself in the social system of
division of labor.
Or as Austrian economist, Friedrich A. Hayek, said at the time of the
two hundredth anniversary of the publication of The Wealth of Nations
in 1976:
“The recognition that a man’s efforts will benefit more people, and
on the whole satisfy greater needs, when he lets himself be guided by
the abstract signals of prices rather than by perceived needs, and that
by this method we can best overcome our constitutional ignorance of most
of the particular facts, and can make the fullest use of the knowledge
of concrete circumstances widely dispersed among millions of
individuals, is the great achievement of Adam Smith
