Adam Smith, Closet Bannonite?

By | 2017-06-02T18:30:05+00:00 August 20, 2017|
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Adam Smith is universally recognized as the father of free market economics and modern globalist free traders like to point to him as the “first free trader” as well. But does their claim hold up in light of Smith’s curiously redacted teaching on the role of economic nationalism in creating conditions for the accumulation of great national wealth?

With Steve Bannon’s departure from the White House, it is worth pointing out that the president’s “Buy American, Employ American” position on trade—credited to Bannon’s “economic nationalism”—is actually on solid theoretical and historical ground, without respect to where Mr. Bannon works.

Adam Smith’s own words make clear that in today’s world he would sooner have been a Bannonite than a “free trader” as that term has come widely to be understood. This is because “free trade” is now “understood” in a way that is in opposition to the way Smith and, then later the American Founders conceived of it.  Our Founders set the stage for the transformation of the thirteen states of the original Union from a rag-tag collection of feuding colonies into an expanding economic powerhouse in an historic quick shift, in part, by consciously following Smith’s most important economic advice.

We should consider it, too, because the basic logic holds today and is expressed most cogently by Bannon and others who agree with him, especially against doctrines that have abstract goals apart from simply advancing America’s independence, peace, and prosperity.

In Book 2, Chapter 5 of his seminal work, An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith analyzes the three high-level employments, or uses, of capital:

  1. The home trade (i.e, domestic production for domestic consumption)
  2. The foreign trade of consumption (i.e.,imports and exports)
  3. The carrying trade (i.e., the infrastructure and industry of international trade such as shipping)

The question he was answering was, “Given some quantity of capital, which of those three possible employments of that capital creates the greatest wealth for a nation?”

If you were going to guess “the carrying trade”—that is, international trade and the infrastructure supporting it —you should stop watching cable news debates about free trade, where the chattering class assures us with goose-stepping consistency that the historical “secret sauce” of American prosperity is opening foreign markets so we can sell our products into them.

This is what Smith concludes:

The capital, therefore, employed in the home-trade of any country will generally give encouragement and support to a greater quantity of productive labor in that country, and increase the value of its annual produce more than an equal capital employed in the foreign trade of consumption: and the capital employed in this latter trade has in both these respects a still greater advantage over an equal capital employed in the carrying trade. The riches, and so far as power depends upon riches, the power of every country, must always be in proportion to the value of its annual produce, the fund from which all taxes must ultimately be paid.

So that the reader has not lost the point of the whole exercise, he immediately follows up:

But the great object of the political economy of every country, is to increase the riches and power of that country. It ought, therefore, to give no preference nor superior encouragement to the foreign trade of consumption above the home-trade, nor to the carrying trade above either of the other two. It ought neither to force nor to allure into either of those two channels, a greater share of the capital of the country than what would naturally flow into them of its own accord.

His logic, spelled out more fully in that chapter, is that by definition domestic production for domestic consumption employs at least twice the productive domestic labor than the same quantity of capital invested in either imports/exports or the infrastructure for trade.

In this context, he makes an important conceptual distinction between the “employments of capital” per se, and foreign trade, which in his framework deals specifically with exporting surplus produce of the home market:

When the produce of any particular branch of industry exceeds what the demand of the country requires, the surplus must be sent abroad, and exchanged for something for which there is a demand at home . . . When the foreign goods which are thus purchased with the surplus produce of domestic industry exceed the demand of the home-market, the surplus part of them must be sent abroad again, and exchanged for something more in demand at home.

Smith’s laser-like focus on understanding what makes nations wealthy permits no quantity of capital to be wasted for this purpose, and all of it is always in the service of the domestic market, even if to service that home market it is necessary to trade domestic surplus abroad for something of equal or greater value not otherwise economically obtainable at home.

How different this emphasis is from the counsel of our modern economists and the chattering class! They tell us trade is America’s “secret sauce” and counsel us never to prefer American goods, if foreign goods can be bought more cheaply, as if it is immoral to choose a more expensive product if there is another good reason to do it. They neglect the significance of capital investment in domestic labor in maintaining a high wage-price structure. The cost of lower prices brought about this way is eventually to lower wages.

Smith clarifies further how irrelevant “trade” is to what makes a nation wealthy:

The carrying trade is the natural effect and symptom of great national wealth; but it does not seem to be the natural cause of it. Those statesmen who have been disposed to favour it with particular encouragements, seem to have mistaken the effect and symptoms for the cause.

All of this is leading somewhere. Once his subject moves on more to political economy in Book 4, Chapter 2, he crystallizes the thought in this famous “Invisible Hand” passage:

But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end that was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. [emphasis mine]

Paul A. Samuelson’s famous textbook—used or decades at the Ivy League schools from which most of our current world leaders first learned about economics—ostensibly reprints this exact passage from Smith. But note the differences. As you will see, the words I put in bold in the quote above are the only ones both excerpts have in common:

Every individual endeavors to employ his capital so that its produce may be of the greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain. And he is in this led by an INVISIBLE HAND to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.

To describe Samuelson’s quote as a paraphrase would be an extraordinarily generous interpretation of the deception he was clearly trying to achieve.

Photocopy of distorted Smith quote in the Samuelson text.

By axing, without so much as an occasional ellipsis, any and every reference to domestic industry, and, more to the point, every individual’s preference for domestic over foreign industry as it is the “thing” in which he seeks his own security and gain, Samuelson knowingly gutted the passage of its primary meaning, and replaced it with his own.

This general preference for domestic over foreign industry is, in fact, the outward manifestation of the very “Invisible Hand”—whether of God or simply human nature—that Smith sees as an essential difference between countries that attain great wealth, and those that do not. There is no amorphous thing called “market forces” like “supply and demand,” as some modern academics teach. He’s talking about a kind of economic patriotism or nationalism rooted in an understanding of God-ordained human nature.

Anyone who tries to tell you Smith’s invisible hand is “supply and demand” or mystical “market forces” simply hasn’t read the passage in its full context, because there can be no doubt what Smith meant to say. Nor can there be any doubt about Samuelson’s intent to suppress it.

Instead what jumps out in Samuelson’s dishonest rendition is a kind of Gordon Gecko Greed-Is-Good “morality of selfishness,” for which the Left routinely disparages “capitalism,” and which unthinking capitalists, particularly of the Randian disposition, foolishly glorify.

What Smith marveled at was the cultural inclination in successful nations to prefer domestic over foreign industry. This naturally encourages the one employment of capital that is guaranteed to increase the wealth and power of the nation—namely, domestic production for domestic consumption.

So what of the claim that Adam Smith was “the first free trader”?

Here is what Smith says just a few paragraphs after his scandalously abused “invisible hand” passage:

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 brought 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.

As we have discussed elsewhere, Smith’s conceptual framework for international trade was based on the absolute advantage of each country’s relative productive capacity. This, as we explained, is very different than the modern Ricardian framework based on comparative advantage.

The difference between Smith and Ricardo is very important to remember in this context because all Smith is saying here is that distorting this absolute advantage through regulation intended to benefit a “particular art or manufacture” in order to create a “monopoly of the home market” can be at best useless and at worst harmful to creating national wealth. This is certainly true.

Micromanagement of private industry in this way, however, is essential in the Ricardian framework upon which modern free trade is based. And it is for this reason that such regulation is widely accepted today as a practical political function of our federal government by the D.C. elite.

In fact, the whole point of comparative advantage is to “direct private people in what manner they ought to employ their capitals” specifically to create a “home market monopoly” in whatever industry is determined to be its comparative advantage, so that some supposedly greater good—presumably higher global production than would otherwise naturally occur, or lifting up poor nations economically—can be achieved.

In other words, Ricardo’s whole exercise was to “spread the wealth around,” so to speak, and his comparative framework is a refutation of the Smithian approach that assumed each nation was in fact “selfishly” pursuing its own economic interest, for the benefit of its home market.

All things considered, one must insist Smith would have objected even more strenuously to regulations of the sort that are all-too-familiar to American workers during this current enlightened era of international “free trade” than he would to ad valorem tariffs that our Founders used for national revenue. Today’s income tax and regulatory regime actively discourages domestic industry and induces American capitalists to prefer foreign over American labor.

In any event, he would have been clear that whatever we claim are our reasons for doing these things, it certainly cannot be for the purpose of making America wealthier.

Yet this kind of micromanaging is something about which modern free traders, much as they pretend to loathe market interferences (when they are tariffs), seem curiously never to offer any strong objections—except, of course, during election campaigns when it is considered permissible to play with opinions of the “rabble.” At this point, however, their winks and nods are unmistakable.

Conservatives should be grateful that after the last thirty or forty years of declining American power, about which the elites have been prophesying the whole time, we now have this unexpected window of opportunity opened, as it seems, by an invisible hand, to reverse this economically unsound and unpatriotic trend.

Foreign tax credits, huge government land-grabs, onerous regulations to discourage specific private industry (for example the determination of Democrats under Obama to shut down the coal industry), income tax credits to encourage specific industries (like solar), and countless other heavy-handed federal polices popular with today’s Democrat and GOP establishments are features of their legislative initiatives and their beloved, massive, unreadable trade deals—but they are all the exact opposite of what Smith would advise, and the opposite of what our Founders actually did to make America great in the first place.

President Trump continually highlights the need to buy American, hire American, and invest in America. Some of his most impressive early achievements include encouraging companies to invest in American labor—whether they were domestic producers considering a move of their factories overseas, or foreign capitalists considering whether to open plants in America.

Trump’s instinct on this issue—perhaps the single most consistent feature of his public platform for the last 30+ years—is not only patriotic, but also, as we have seen, good Smithian economics. His bully-pulpit encouragement to invest in American labor and his promise to eliminate harmful regulations and inducements that prefer foreign over American labor is surely something for which Adam Smith would have given him high marks.

Conservatives should be grateful that after the last thirty or forty years of declining American power, about which the elites have been prophesying the whole time, we now have this unexpected window of opportunity opened, as it seems, by an invisible hand, to reverse this economically unsound and unpatriotic trend.

Contra Gordon Gecko, greed is not good, and Adam Smith never said it was. It’s time modern American conservatives stopped their mindless embrace of the abstract concepts of capitalism and free trade as if they were religious dogma and remember the thing for the sake of which these ideas were developed as guides. America’s original free market system, as it was designed and functioned until the advent of the modern administrative state, put America’s freedom and prosperity first. The so called “free market” dogma, combined with today’s administrative state, on the other hand, have caused us largely to forget what America, not to mention the free market, was all about.

About the Author:

Bob Calco
Bob Calco is a verified Deplorable who lives in Tampa, Florida, with his wife, two sons, and four cats. A successful software architect by trade, and an inveterate polyglot and world traveler at heart, he studied political philosophy until it was clear that to pay bills he needed a marketable skill. His passion on issues related to trade and economics go back to his formative college days, when he learned to distrust, and independently verify, literally everything he was taught.
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8 Comments

  1. N.S. Palmer August 20, 2017 at 3:33 pm

    David Ricardo’s writing on free trade offers even more support for Adam Smith’s view than you mentioned. In particular, Ricardo assumed that capital would move around within each country but usually not from one country to another — i.e., companies would not offshore jobs and production. In Chapter VII of “The Principles of Political Economy and Taxation,” Ricardo wrote that:

    “If the profits of capital employed in Yorkshire should exceed those of capital employed in London, capital would speedily move from London to Yorkshire, and an equality of profits would be effected; but if in consequence of the diminished rate of production in the lands of England from the increase of capital and population, wages should rise and profits fall, it would *not* follow that capital and population would necessarily move from England to Holland, or Spain, or Russia, where profits might be higher.”

    Contemporary corporate practice of offshoring American jobs to low-wage countries is exactly the opposite of the policies recommended by the patron saints of free trade, Adam Smith and David Ricardo.

    • Bob Calco August 20, 2017 at 6:05 pm

      Smith and Ricardo lived in an era that seems quite distant now with regard to factors like mobility and time. Capital and labor are both more mobile than either could have imagined, and it takes seconds to transact some forms of business today that used to take months or even years. But these factors haven’t changed the fundamental logic as I will point out in a future article.

      Regardless of technological advances that accelerate some of the math, per capital capital investment in domestic labor is *still* the single determinant of wage rates, and the basic logic of Smith’s employments of capital still is valid, assuming your goal is to maximize the wealth of a nation. Ricardo’s framework, though based on similar set of realities to those in which Smith lived, is really about maximizing wealth globally, without regard to the national interest of any one nation. But nations, like people, aren’t altruists, and of the two Ricardo’s framework invites a lot more government monkey business to achieve its purported ends — indeed it requires a layer of government even above that of individual nations. Which is what gets bureaucrats in New York and Brussels and their allies in academia all lathered up to ensure the Smithian, now Trumpian, model is made taboo.

      I have a strong preference for Smith over Ricardo, among other reasons, because Ricardo’s labor theory of value, which underpins Marx’s dialectical materialism as well as Keynesian economics, has been so destructive of wealth during an era that otherwise has seen immense progress in standards of living in every country where market economics got any kind of foothold—especially the United States. That said, as I plan to point out in a future article, Ricardo has also been used and abused by philosophical free traders whose economics are also much closer to Smith’s framework when they’re being honest.

  2. Luke Lea August 20, 2017 at 4:11 pm

    Need to distinguish between international trade and international mobility of capital. The theory of free trade assumes capital is not mobile. In today’s world capital is free to invest in low-wage countries overseas where the return on investment is higher. Those are the new rules of the game, set in Washington in the 1990’s. Once in place, companies that don’t take advantage of them can’t compete with companies that do. They really have little choice if they wish to remain in business.

    The lesson here is don’t blame the corporations. Blame Congress and the wealthy American families — the so-called donor class — that elected them. See my “Gatt Justice: Who Gets the Gains of Trade” for details: https://goo.gl/7st4y6

    • Bob Calco August 20, 2017 at 5:43 pm

      In the modern world capital is mobile and its movement is governed by a law: the law of equilibrium.

      My main point in highlighting the differences between Smith and Ricardo is to point out that they had not just different frameworks for trade but more importantly were trying to solve different problems. Smith was trying to understand under what conditions some nations become wealthy while others don’t. Ricardo was trying to fathom a win-win that might induce wealthy countries to trade with poor countries regardless of absolute advantage.

      But when you consider this extra layer of indirection implicit in Ricardo’s calculus you have to wonder how it’s supposed to “happen” without some form of government policy to make it so. Capital was not mobile in their time like it is today, which in my view makes the current policy of interdependence according to the Ricardian framework even more certain to lower American wages. I don’t blame corporations but rather government policy since it is the only entity with the monopoly of force in society capable of imposing the goals of global interdependence and wage equalization.

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  3. kalendjay August 21, 2017 at 4:22 pm

    Adam Smith had other observations of note on “the carrying trade”, which might be translated as “middlemen” to modern readers.

    He disdained absurd British subsidization of merchant fleets. He pegged tradesmen for the tendency to “conspire” against the public with price fixing. And as all this was consonant with shrewd, almost neo-marxian observations about capitalism, he noted that depressed wages were not a feature of prosperity, but of things “fast hurtling backwards”.

    National economic autarchy is actually a concept going back to John Locke, who reasoned that legal order in trade stops at a nation’s borders. The idea seems to be more true than one would suppose, given the tendency of modern nations to create deliberate legal loopholes to achieve national economic advantages.

    And as for comparative advantage, that almost doesn’t exist today. Wacky Paul Krugman earned a Nobel Prize demonstrating the same.

    • Bob Calco August 21, 2017 at 4:56 pm

      Great points, kalendjay. Most abstract isms don’t exist, and yet we spend so much time defending them over real, historical things. Thanks for reading my article!

    • GeorgeLeS August 23, 2017 at 5:18 am

      “He disdained absurd British subsidization of merchant fleets.”

      There’s a problem with that. It amounts to evaluating a policy in purely economic terms, when the primary goal was not simply economical. It was military. Britain needed a large pool of able seamen, and these subsidies (and the Navigation Acts) were primarily the result of that need*. This was not an optional policy for Britain, but a matter of simple survival.

      Even as it was, it the RN had a very difficult time manning the fleet in a major war, and had to resort to impressment, and to accept a minimum of only 1/3 able seamen. But if you compare their situation with those of France or Spain, the policy worked.

      Perhaps it would have been better to build a naval reserve, and in fact the Admiralty did make some stabs in that direction. But Parliament wouldn’t go there. The subsidies and Navigation Acts were saleable to MPs, as the MPs could see a profit in them.

      *(When first adopted, the Navigation Acts were also directed strategically against the Netherlands; what today we would call “sanctions.”)

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