Adam Smith and Free Trade

Roy Douglas

[A paper presented at the 13th International Conference on Land Value Taxation and Free Trade. Douglas. Isle of Man. September 1973]

A cock is introduced into a run of hens who have been laying sterile eggs. Shortly afterwards, these hens begin to lay fertile eggs. Most people would have little hesitation in saying that the presence of the cock causes the eggs to be fertile. The same cock crows in the morning, and shortly afterwards the sun rises. Most people would be far less willing to admit that the crowing of the cock causes the sun to rise. This symbolises one of the crucial problems of the historian: to decide to what extent we are entitled to say that one event causes another event which arises later.

Adam Smith published An Enquiry into the Nature and Causes of The Wealth of Nations in 1776, Seventy years later, men who proclaimed that they were inspired by Smith set this country on a certain course of economic policy. Did Adam Smith cause this policy to be applied? Would it have been applied if he had never lived, or if he had never written The Wealth of Nations? I shall return to this question later; but first let us look at the context into which Adam Smith fits.

Adam Smith was born 25O years ago this year, at Kircaldy, in Scotland. He was an academic, who first held the Chair of Logic and later the Chair of Moral Philosophy at the University of Glasgow. Then, for about thirteen years, he withdrew from academic life, and the product of his period of withdrawal was The Wealth of Nations. Two years later he became -- oddly enough -- a Commissioner of Customs, and held that post until his death in 1790.

The date of The Wealth of Nations, 1776, is perhaps significant, because it is also the date of the American Declaration of Independence, and those two events are not unconnected. The Declaration of Independence was one of the biggest nails in the coffin of an economic system called Mercantilism, which was attacked with great power and persuasion by Adam Smith. Economic systems, like Topsy, often "just growed." A large number of Acts of Parliament, dating right back to the Middle Ages in some cases, had prescribed that goods should be brought to England only in English ships, manned principally by Englishmen. These Acts, the "Navigation Acts," were linked to an economic theory of even greater antiquity: the theory that there is some special magic in the metals gold and silver; and that a nation should therefore bend every effort to ensure that the quantity of those metals in its possession does not decrease. To state this in modern jargon, we ought to have a "favourable balance of trade," with more exports than imports. This doctrine led to another idea of rather startling modernity; the idea that certain bits and pieces of the world which happened to be linked with Britain should constitute a closed economic system -- a sort of Common Market, but controlled in its direction by people who happened to be sited in London instead of in Brussels. For a variety of reasons, people living in the British colonies in North America didn't like economic control from London, and rebelled against it. As the American colonies formed a very substantial proportion of the Empire of the time, this left the Mercantile System largely discredited, and made people ready for a re-think.

Enter Adam Smith. He was not a professional economist, but a philosopher: and he was much influenced by an idea floating around at the time -- the idea of the Physiocrats. They were people who believed, among other things, in the recuperative powers of the human body, provided that people didn't interfere too much with its functioning. Thus we find Adam Smith advising his friend the philosopher David Hume against going to Bath to "take the waters" -- holding that medicinal waters would damage rather than help his health. This same spirit Adam Smith applied to economics. Let things take their own course; don't try to regulate trade; let people judge their own economic interests, and act on that judgment; and the overall results will militate for the general good. Let trade be free; and the Unseen Hand of Providence will ensure that men who are admittedly seeking only their own interests, succeed as well in advancing the interests of others.

Such ideas provided a convenient philosophical basis for people who had just discovered that mercantilism wasn't working. Even before Britain had finally recognised the independence of the American colonies, we find Lord Shelburne -who became Prime Minister in 1782 -- veering towards the Smithite view, and contemplating a settlement with the Americans based on trade liberation. Of course by then it was too late to save the American colonies; but Shelburne recognised that it was more valuable for Britain that these colonies should be prosperous, and should expand into the hinterland, and thus increase the market for British goods, than that they should be tied to Britain in an economic and political union they did not want.

Lord Shelburne concluded peace with the Americans, and then suffered the usual penalty for being right: he was thrown out of office. After a brief and rather strange political interregnum, he was followed by William Pitt the Younger, who became Prime Minister in 1783, a few months before his 25th birthday. Pitt had been associated with Shelburne, and was strongly influenced by Adam Smith, although it would be quite wrong to regard him as in any sense a doctrinaire free trader. There is a story, however, that on one occasion Adam Smith was about to address Pitt and his colleagues, and invited them to sit down before he began. To this the Prime Minister replied "No, we will stand till you are first seated, for we are all your scholars." Pitt was able to make some moves in Adam Smith's direction. Thus he granted a great reduction in the tax on tea; he concluded a commercial treaty with France, and he was partially successful in his aim to establish reciprocal free trade between Great Britain and Ireland.

Then came the French Wars. Pitt, like many other reformers, largely forgot his economics in his preoccupation with winning the war. Long before that war ended in 1815, Pitt was dead.

During those wars, trade with the continent of Europe had been largely regulated by the exigencies of war itself. In the immediate aftermath, Parliament was forced to decide what principles of trading should apply in the future. That particular Parliament was certainly unprepared for any bold new policies, whether those of Adam Smith or of anyone else. They did what British governments tended, and still tend, to do when a new situation appears; they turned to the first idea that suggested itself. The most important and crucial of the expedients they devised was the Corn Law of 1815, which prescribed that foreign agricultural produce should not be imported into this country unless the price rose to an exceedingly high figure. In other words, in their first form the Corn Laws were not a system of tariffs, but an embargo.

Of course, we see the hand of a landlord-dominated legislature in all this; but perhaps we are being over-subtle in so doing, and are imputing more malice and less muddle than we should into their motives. I much doubt whether the majority of members of that Parliament had any understanding of the economics of the situation, whether from the landlords' point of view or any other; and I suspect that they were as strongly motivated by the desire for economic self-sufficiency for defence purposes as by any calculations of economics .

As Britain settled down gradually after twenty years of warfare, the doctrines of Adam Smith gradually became current again . By 1820 we see the merchants of the City of London petitioning Parliament for a new economic policy -- urging that the principle of buying in the cheapest market and selling in the dearest (which every man applied in his own business) was equally applicable to the trade of the nation as a whole. Epitomising this new spirit was William Huskisson, who became President of the Board of Trade in 1823. Huskisson is noted for several reforms in the free trade direction. Through his advocacy the old embargo on foreign corn was to be replaced by a sliding scale of import duties. He also secured a general revision of import duties on goods other than food which were generally brought down to 30 per cent or less of the value. Apparently Huskisson calculated that smuggling was worth while if duties were very high, but not if they were low. We also remember Huskisson for another important reform; it was during his period in office that the old Navigation Acts, which we have seen as a vital part of the Mercantilist system, were drastically reduced in scope.

We may add to Huskisson's reforms of the 1820s some others devised about the same time by F.J.Robinson -- "Prosperity Robinson" --Chancellor of the Exchequer. What characterises all of these economic reforms however, is that they were generally viewed not so much as great matters of principle over which men must fight, but as essentially administrative changes, which could proceed through Parliament with remarkably little trouble. Here is a striking return to the spirit of William Pitt's reforms Joe fore the French Wars. There was no sudden, drastic change; just a gradual evolution in a more liberal, more Smithite, economic direction.

There follows a long period in which the reforms which attracted most attention were political rather than economic. We must not imagine, however, that this preoccupation was necessarily inimical to the wishes of the most ardent free traders. Richard Cobden himself, most distinguished of them all, was writing as late as 1837; "Make the ballot the cry ... the English people cannot be made to take up more than one question at a time with enthusiasm." The following year, 1838, saw a drastic change of direction. The harvest was bad, and in September the Anti-Corn Law League was set up, and commenced its campaign for all-out repeal of the Act of 1815.

The story of the Anti-Corn Law League -- "the League", as contemporaries called it -- has been told many times, and 1 do not propose to tell it again. To understand that story, however, it is essential to remember that the League was largely competing with other movements for the attention of the public. Chief of these competing movements was Chartism, whose aims were essentially political rather than economic reform. We are often told that the League was a middle-class organisation and the Chartists a working-class organisation. I do not know what these terms mean in the context, and I suspect that nobody else does either. Both were led mainly by middle-class people, and both had a following composed mainly of working-class people. There was no logical reason why a man should not support both; but in fact there was a good deal of competition -- not to say enmity -- between them. Perhaps Cobden!s point about men being unable to concentrate on more than one reform at a time was appreciated and understood. Both movements tended to decline in the early 1840s, when prosperity returned.

In 1846, as we all know, the Corn Laws were repealed, and foreign grain was allowed freely into this country. It took a further period of economic depression to do this. The Prime Minister, Sir Robert Peel, split the historic Tory Party irrevocably in encompassing this great reform. Indeed, he very nearly shattered the League as well. Peel's proposal was not immediate and total repeal of the Corn Laws, but a gradual run-down. Some of the extremists in the League wanted to fight him on this. Wiser counsels prevailed, and the Corn Laws went.

When the destruction of the Corn Laws became fully effective, at the end of the 1840s, there began a gradual increase in prosperity for all social classes, which lasted for practically thirty years. In the first couple of decades nearly all of the remaining restrictions on trade were removed. The repeal of the Corn Laws had demoralised the protectionists completely. Some local politicians talked about a return to the Corn Laws, but the people who mattered realised that the war had been decided. When the wall had been breached, nothing could withstand the free traders.

Let us return, however, to Adam Smith. How big a part did he play in the story? This sort of question is always one which plagues historians. We cannot conduct what the scientists call a "controlled experiment." We cannot re-enact the history of the late eighteenth and early nineteenth centuries, leaving out Adam Smith, and see how far that history differed. All we can do is to guess. We know on the one hand that all the free traders paid repeated acknowledgements to The Wealth of Nations, yet this doesn't prove that The Wealth of Nations played an indispensable part in the events. There were many economic considerations, as well as ideas, which made men receptive to free trade.

The significance of Adam Smith, I think, is this. Suppose there are a lot of people in a theatre, and that theatre is on fire -- or people think it is on fire. A man stands up and shouts that he has found an exit. Many people will go in the way he points. Adam Smith's intellectual power, and the depth of his analysis, did not cause the free trade movement, but it gave credibility to that movement, and it gave free traders the ear of statesmen and public alike when the times of trouble appeared. It gave them the sort of moral confidence that comes from winning arguments; from feeling that their case was so strong that they could meet and defeat any opponent on any ground he chose.