Adam Smith, Economic Nationalism, and the Case for Free Trade

This essay is part of our collection on nationalism. See the full collection here.

The year 2016 marks not only the 240^th anniversary of the Declaration of Independence but also the anniversary of one of those rare books that truly merits the title “revolutionary.” Published on March 9, 1776, Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations explained some of the major economic changes already underway in the West while also providing a theoretical apparatus for policies that would radically change the way millions of people lived their lives.

Today, however, much of the world seems increasingly skeptical of Smith’s insights, especially his case for free trade. Symptoms of this skepticism include Bernie Sanders and Donald Trump’s outspoken critiques of free trade agreements such as NAFTA and the more recent Trans-Pacific Partnership (which Hillary Clinton advocated as Secretary of State but now opposes). These echo the anti-economic globalization rhetoric that unites most of the European left and far right. The alternatives on offer include proposals to run entire economies as if they were a business, various versions of social democracy, or the outright populism that’s strong on emotivist rhetoric but produces economic dystopias like Venezuela and Argentina.

Such seemingly disparate proposals share a commitment to what might be called economic nationalism. This manifests itself in the form of policies that seek to enhance government control of economic life in the name of the national interest. These include substantial limitations on the movement of goods, labor, and capital, as well as measures to shield domestic businesses and employees from foreign competition.

Smith’s Wealth of Nations may be the most powerful critique of such policies and their underlying rationales ever penned. Smith’s arguments, however, go beyond efficiency considerations. They are worth revisiting if we want to understand what’s at stake, economically and politically, if enough countries decide that global economic integration is no longer desirable.

The Power of Bad Ideas

One of Smith’s achievements in his Wealth of Nations was to illustrate how erroneous ideas can unduly limit the pursuit of perfectly legitimate human endeavors. Between the early sixteenth and mid-eighteenth centuries, the prevailing view was that the benefit of foreign trade for a country was primarily the extent to which it allowed a nation to accumulate gold and silver. The more precious metals it possessed, the better off a country was.

Many consequently believed that national prosperity depended upon making many exports and taking few imports. In this way, the argument went, countries could facilitate heavy inflows of foreign exchange and steady growth in their precious metal reserves. Nations consequently subsidized exports, imposed heavy import restrictions, and implemented regulations that sought to force trade between nations to be conducted via specific ports and cities. Smith called such arrangements “the mercantile system.” At its heart was a vision of economic life as a zero-sum game in which one country’s gain only came about through another nation’s loss.

Smith, however, demonstrated that economic well-being had little to do with a country’s gold and silver holdings. Rather, he held, it primarily flowed from the development and extension of the division of labor within and between nations. The ensuing specialization in production facilitated economies of scale and created incentives to find and develop one’s competitive advantage. The result was enhanced efficiency and economic growth: the wider and deeper the size of the market, the greater the division of labor and the subsequent gains in productivity and growth.

Even today, Smith’s analysis remains the core of the argument for free trade. But it also highlights how a contemporary retreat into what might be called neo-mercantilism puts all this in serious peril. Over the past nine years, America has steadily fallen down the rankings of economically free societies in the wake of significant restrictions on property rights and on business, investment, financial, and labor freedom. Such restrictions make a society less competitive, undermine entrepreneurship, and contribute to slower growth rates. A retreat from free trade would not only worsen this situation. It would also raise the price of a good number of foreign-made products and services, thereby putting many such goods beyond the reach of lower-income Americans. It is unclear, at best, how such developments could be in America’s national interest.

Inefficient and Unjust

Of course, a nation’s common good cannot be reduced to economic dynamism or GDP growth. Smith himself never made such claims. Nor, however, should we forget something else underscored by Smith: that all forms of economic nationalism are premised on denying freedom to large segments of a country’s population.

This was an essential element of Smith’s critique of guilds. Leaving aside the ways in which they tried to constrain innovation, guilds often successfully lobbied for laws that permitted price-fixing and forbade non-guild members from practicing a trade. On a national scale, Smith stressed that mercantilism was underpinned by close relationships between governments and particular merchants. Businesses were granted legal monopolies on particular trade routes and/or the buying and selling of specific products. In return, they lent political and economic support to the government. From this standpoint, mercantilism prefigures what we would today call cronyism, and produced pre-industrial versions of Hillary Clinton and Donald Trump.

More generally, Smith saw such thinking and its institutional expressions as embodying unjust inhibitions upon people’s freedom to innovate, trade, use their property, and associate with others. Such liberties were not, to Smith’s mind, beyond any limitation. His Lectures on Jurisprudence and Theory of Moral Sentiments illustrate that he believed these freedoms should be enveloped by a framework of laws and moral expectations. There is, Smith understood, no such thing as a market without legally enforceable rules.

That said, Smith also demonstrated a point not often understood, even today. Many businesses regularly conflate their economic self-interest with the public good to justify particular favors from the state and government protection from foreign and domestic competitors. This is especially true of large corporations. Unlike many smaller and medium-sized enterprises, they have the resources and connections to lobby legislators and regulators. That’s one reason why hard questions should be asked about every proposed subsidy and economic regulation that seeks to restrict free trade. Far from being in the public interest, the beneficiaries often turn out to be far fewer than often realized.

War and Peace . . . and Trade

The last dimension of Smith’s case for free trade concerns the way in which it tends to facilitate peaceful relations between nations. According to Smith, mercantilism’s zero-sum view of the economy encouraged military conflict as sovereign states used force to acquire and protect colonies. This was integral to the global struggle between France and Britain throughout the eighteenth century.

Smith maintained that free trade usually ameliorated this source of tension between nations. One effect of free trade within and between countries is that it encourages us to look beyond local, regional, and national boundaries and even major political and religious differences. We realize that everyone has a propensity, as Smith wrote, to “truck, barter, and exchange,” something that “is common to all men, and to be found in no other race of animals.” This facilitates our interaction with, and awareness of, people whom we might not otherwise encounter. In this regard, free trade arguably does much more than international political institutions such as the United Nations to put those who don’t belong to the world’s political classes in touch with each other on a continuous basis.

Free trade isn’t a universal solution to all our problems. Indeed, a move away from protectionism often has negative impacts on particular communities. Smith’s awareness of these effects underlay his recommendation that transitions away from protectionism should be gradual rather than abrupt. Nor is free trade going to dissuade radical jihadists from trying to destroy the West, stop the persecution of Christians in the Middle East, or inoculate the globe against armed conflict. As John Maynard Keynes observed in his Economic Consequences of the Peace (1919), the world’s economies were relatively integrated in the years leading up to World War I. This wasn’t enough to stop the march to catastrophe in 1914.

These truths, however, don’t constitute compelling arguments against free trade. They simply illustrate that we shouldn’t expect free trade to resolve difficulties whose causes go beyond economics. Smith’s Wealth of Nations clarified that, in the long run, free trade is in a country’s national interest. To that extent, true patriotism—understood as love of country that eschews disdain for or fear of other nations—should incline governments toward extending economic liberty across national boundaries. Certainly, free trade’s benefits only become apparent over time, are widely dispersed, and are in many cases “unseen.” These factors make free trade a hard sell in the conditions of modern democracy. But as Smith might have said, this is why we need statesmen: people who can explain to the citizenry that patriotism and nationalism are not the same thing—including when it comes to the economy.