TWoN Book 4 Chapter 3

In this chapter Smith gets into restrictions on trade in some detail.  In brief, he argues that restricting trade, while not always a mistake, will never be advantageous economically to society as a whole, but at most to certain small sections of it.  He address balance of trade, and makes some interesting points.  In brief, he claims that it is a mistake for nations to worry about the balance of trade, because even if the balance favors country A over country B, both countries are nevertheless gaining by free trade; it is just that country A is gaining more.  Attempts to correct this, will harm the economies of both countries.  I have no idea if this is true, frankly; or if it was true in his time, and no longer true in ours.  But either way, it certainly emphasizes  (if any emphasis were necessary by this time!) the close ties between the market economy, and the nation-state.

He observes on page 372 that there is no certain way to no which of two countries is favored by the balance of trade; I suspect this is out of date.  “National prejudice and animosity, prompted always by the private interest of particular traders, are the principles which generally direct our judgment upon all questions concerning [the balance of trade].”  Maybe.  Certainly the private interests play a role, but I wonder if, today, “national prejudice and animosity” are not the product of economic competition between nations, rather more than the reverse.

Page 373: “The ordinary state of debt and credit between any two places is not always entirely regulated by the ordinary course of their dealings with one another; but it is often influenced by that of the dealings of either with many other places.”  If he had only known!  Far, far more true today!

Page 375: On the value of coinage in different countries:  “In France, the workmanship, as you pay for it, adds to the value, in the same manner as to that of wrought plate.  A sum of French money, therefore, containing a certain weight of pure silver, is more valuable than a sum of English money containing an equal weight of pure silver, and must require more bullion, or other commodities, to purchase it.”

Page 377: “Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded.”  Further down: “By advantage or gain, I understand, not the increase of the quantity of gold and silver, but that of the exchangeable value of the annual produce of the land and labour of the country, or the increase of the annual revenue of its inhabitants.”

Page 380:  “A direct foreign trade of consumption is always more advantageous than a round-about one.  But a round-about foreign trade of consumption, which is carried on with gold and silver, does not seem to be less advantageous than any other equally round-about one.”

Page 381: “It deserves to be remarked, too, that, if we consult experience, the cheapness of wine seems to be a cause, not of drunkenness, but of sobriety.  The inhabitants of wine countries are in general the soberest people in Europe; witness the Spaniards, the Italians, and the inhabitants of the southern provinces of France.  People are seldom guilty of excess in what is their daily fare.”  Um.  I don’t know.  This feels a bit like “if all you’ve got’s a hammer.”  I strongly suspect that a tendency toward over-indulgence  in a society has a lot more to do with social conditions leading to despair.

On page 382, on the same subject: “The sneaking arts of underling tradesmen are thus erected into political maxims for the conduct of  a great empire.”  I just like this.

Page 383: ” But the mean rapacity, the monopolizing spirit of merchants and manufactures, 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.”  Right, except they ARE the rulers of mankind.  For now.  Further down: “The wealth of a neighboring nation, however, though dangerous in war and politics, is certainly advantageous in trade.”

On page 384-5, he talks about how those wishing to acquire wealth move to the towns, because they know that where a lot wealth circulates, there is more wealth to be got, and the same ought to apply to nations, but that modern economic maxims mistakenly aim at impoverishing one’s neighbors.   “It is in consequence of these maxims that the commerce between France and England has in both countries been subjected to so many discouragements and restraints.”  I am not convinced that this desire among capitalist countries to impoverish their neighbor is, in fact, rooted in mistaken “maxims.”

Page 386: “They are both rich and industrious nations; and the merchants and manufacturers of each, dread the competition of the skill and activity of those of the other.”  Well, yes.  That seems only natural.  It is what competition means.

Page 387: “If the exchangeable value of the annual produce, it has already been observed, exceeds that of the annual consumption, the capital of the society must annually increase in proportion to this excess.  The society in this case lives within its revenue, and what is annually saved out of its revenue, is naturally added to its capital, and employed so as to increase still further the annual produce.”  It is important to remember, however, that we are dealing with a closed system–there are not limitless markets, or resources.

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0 thoughts on “TWoN Book 4 Chapter 3”

  1. Just to show I have read this, here’s a typo:

    “He observes on page 372 that there is no certain way to no which of two countries is favored by the balance of trade;”

  2. Free trade, like microeconomics in general, rests on relative value. You are always selling something you value less than its price to people who value it more than its price. The value of international trade is that you get a larger universe of potential people to exchange with, and a larger universe of goods to exchange. Ricardo went into this topic at greater length, and Krugman recently received a Nobel for a more sophisticated trade model under conditions of imperfect competition.

    Free trade yields: 1) greater potential scale for domestic goods, 2) cheaper, more plentiful goods of the sort we’ve been producing domestically, and 3) a greater variety of goods than we would have with borders closed to trade.

    There are good reasons to protect very small domestic industries during the incubation phase, but broad trade protectionism makes consumers in both nations worse off more than it makes producers in either country better off.

    While markets are not physically infinite, it’s worth noting that since the late 18th century, for the first time in human history, we’ve experienced a growth rate substantially greater than the growth of population, due to improvements in production and distribution technologies.

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