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Why the Free Trade Debate Needs the Real Adam Smith

| Mar 31, 2022 | Trade

Photo by K. Mitch Hodge on Unsplash

Oren Cass is right to note that modern economists largely misunderstand Adam Smith. But the misunderstanding runs deeper and traces even further back than editorializing in 20th-century textbooks. For more than two centuries, scholars have ignored the relationship between Smith’s political philosophy and economic analysis. It began with Smith’s own friend and biographer, Dugald Stewart, who, in an effort to preserve his legacy and make his ideas more politically acceptable, divided Smith’s views on economic freedom and political liberty. Scholars and economists today maintain this artificial divide, characterizing Smith as a conservative on economic issues like free trade and small government, while overlooking his political views on egalitarianism, toleration, anti-imperialism, and religious freedom.

But Smith’s actual views cannot be understood without both halves. Consider his general opposition to state intervention. For Smith, the state was not the right institution to regulate trade because government policy was about force. Smith believed that you cannot force people to trade just as you cannot force them to exhibit virtuous behavior. They must do it willingly. Therefore, Smith spent much more time discussing the Golden Rule—“to do unto others as you would have them do to you”—than he did the Invisible Hand. Political philosophy mattered as much as, if not more than, pure economic analysis.

This fuller picture of Adam Smith is sorely needed in discussions about globalization. One of the central questions in economic history is why the conditions of people improve in some places but not in others. Interest in this question has grown since the middle of the last century as real income in many large societies has dramatically increased, global poverty has fallen, and more countries have democratized. Scholars have found that particular cultural, social, and political arrangements—namely the security of property rights, attitudes towards scientific progress, access to financial markets, and universal education—are important parts of the answer. But even these arrangements alone are insufficient.

Maintaining markets that are open to external competition is also important to economic development. Nobel laureate Douglas North and his coauthors have suggested that these “open-access orders” are essential to achieving both economic growth and political stability. Societies that pursue a policy where prospective entrepreneurs can freely compete with established businesses helps create a political economy in which systematic public corruption is kept in check. Without open-access policies, political elites offer economic protection (e.g., monopolies or tariffs) to those in their political coalition and create economic rents that they exploit at the expense of everyone else. This corruption is toxic to economic growth and fosters an attitude of mistrust within society.

Adam Smith would have understood the importance of open-access orders because he made the argument himself. Smith was not primarily concerned with state intervention, and he even supported state action to provide public education and religious protection, while subsidizing the arts, among other things. However, Smith was very concerned with the corruption of markets by politicians. Political concerns about collusion between politically well-connected merchants and government formed the basis for Smith’s assailment of mercantilism in The Wealth of Nations. Smith was perfectly blunt in calling this political protectionism “a conspiracy against the public.”

The case for an open-access economy therefore does not preclude regulation or even certain trade restrictions. But restrictions to markets cannot be unequally applied. This includes politically motivated development of the private sector over the protection of markets. Evidence from nations where state-led development is the norm, such as modern China, suggests that state involvement is associated with public corruption and may increase economic growth but only for a period.

The real Adam Smith believed that for free trade to exist it had to be reciprocal—that is, between equal trading partners who treated each other’s preferences as their own. Without reciprocity, exchange is no longer free trade, but rather some level of extortion. Today’s economic policymakers would be well advised to return to Smith for wisdom that does not expire.

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Paul Winfree is the Director of the Thomas A. Roe Institute for Economic Policy Studies as well as the Richard F. Aster Fellow at The Heritage Foundation.

@paulwinfree

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