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  • Writer's pictureDrew Maglio

Adam Smith's Timeless Critique of the Mercantilist Impulse (originally published 7/1/2020)

Adam Smith, the father of the discipline we now refer to as economics, was a moral and political philosopher of the Scottish Enlightenment and contemporary and acquaintance of Edmund Burke. Long heralded as a proponent of self-regulating markets, limited government, and free-market “capitalism,” Smith is often invoked by proponents of corporate capitalism as an archetype of reason, worthy of reverence. When reading Smith however, one is confronted with the startling fact that his ideas have been misconstrued and adulterated.

Adam Smith Detested Mercantilism

Adam Smith opened his Inquiry Into the Nature and Causes of the Wealth of Nations by declaring that it “was an attack on the whole commercial system of modern Europe.” Specifically, Smith’s seminal work was an attack on the political and economic system known as “mercantilism.” Mercantilism, derived etymologically from the French word for merchant, was the dominant economic system of early-modern Europe. A precursor to the more liberal market economies of the 19th century, mercantilism was a system in which merchants and bankers were the “chief architects of public policy,” as Adam Smith noted in his critique of the economic system. A historical case-study reveals a plurality of horrific byproducts of the mercantile system during the age of empires and colonialism. Perhaps the quintessential example of the repugnance of mercantilism was the British East-India Company and its doings in the Orient. In the name of trade, the East India Company carried out a multitude of atrocities across the region, inciting wars to traffic drugs via its own private army—even leading to the usurpation of sovereign nations, as was the case in India.[1] Initially backed militarily and subsidized financially by the British Empire, the British East-India Company was a multi-national monstrosity like few others. The Dutch East India Company was another example of the mercantilist joint-stock company, which was in essence a public/private conglomerate, granted exclusive monopolies over trade in certain regions and given special legal status and protections.

Mercantilist Doctrines Lead to Calamity for All But the Few

Central to mercantilist notions of trade was the concept of balanced trade, which has once again come to the forefront in our own time. Propagated subversively with avaricious intent, the fallacious doctrine of balanced trade viewed wealth as finite rather than unlimited.[2] For a country to be deemed wealthy in a mercantile economy, it must operate under a trade surplus, rather than a deficit—and thus nations work to achieve a trade surplus and in doing so war with one another instead of working together by exchanging goods based off of their own unique natural resources. Consequently, in the pre-capitalist societies of early-modern Europe, wealth was measured in gold holdings and natural resources, not gross domestic product. The value placed on gold in particular, was the impetus spurring the Spanish to pillage as much gold from the Americas as possible, encouraging brutal conquest while simultaneously causing immense inflation in European markets in the process.[3] The emphasis on natural resources including cash crops, lumber, and iron fueled imperial expansion to secure the raw materials necessary for domestic industry to manufacture goods for export on the burgeoning world market. Many Continental and imperial wars between European powers were fought over the dogmatic articles of mercantilist faith, including the Anglo-Dutch Wars fought over the Navigation Act of 1651, which were designed to boost English trade interests at the expense of the Netherlands. Playing on national prejudices inherent in most human beings, mercantilists were able to arouse popular sentiment to further their own ends which struck a chord with Adam Smith.

Adam Smith’s Critique of the “Whole Commercial System of Europe”

Adam Smith is often portrayed as a champion of de-regulation and unabated capitalism, yet Smith was a staunch opponent of the “vile masters of mankind,” whose maxim he understood to be “all for ourselves and none for others.” In mercantilist policy, these vile masters of mankind were the “chief architects of public policy,” who sought to craft legislation to benefit themselves by limiting competition and creating barriers to entry. In his lengthy treatise, entitled An Inquiry Into the Nature and Causes of the Wealth of Nations, Smith thoroughly rebuked the commercial system of Europe, particularly that of Great Britain. In his analytical critique, Smith notes specific pieces of legislation that demonstrate his major premise that laws regulating commerce generally benefit the producers who craft them, not consumers. The recurring motif of Smith is,

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices . . . though the law cannot hinder people of the same trade from assembling together, it ought to do nothing to facilitate such assemblies.

Smith conveyed the public should consequently be leery of any piece of legislation drafted and endorsed by those who seek to utilize the state as vehicle to further their own ends:

To widen the market and to narrow the competition, is always the interest of the dealers . . . to narrow the competition must always be against it (the public) . . . the proposal of any new law or regulation of commerce, which comes from this order, ought to always be listened to with great precaution.

In his long-winded analysis, Smith notes how the “Statute of Apprenticeship,” instituted during the reign of Elizabeth I of England, benefited the masters of various trades as opposed to the public at large. Under the guise of safety and quality control, laws regulating the length and requirements of apprenticeships actually served to limit competition by creating barriers to entry. This is because artisans who would otherwise be working for themselves had to work under the tutelage of a master for a pre-ordained amount of time chosen by a conglomeration of the masters themselves, who then lobbied the government to codify into law their arbitrary decree. Smith argued that long apprenticeships of seven years actually served to reduce quality, because by limiting competition, the incentive to work was abolished. Not only did the masters receive via free labor what was in essence indentured servitude, but by artificially limiting supply in order to raise prices, the masters freed themselves from the necessity of competition and the market-driven imperative of crafting high-quality goods at a competitive price. In our own centralized age, there are even more barriers to market entry in every market sector.

De-Regulation is Not Always in the Public Interest

Smith believed laws championed by the laboring classes to generally be in harmony with the public interest. What he and other classical liberals opposed were measures that affected the many for the benefit of the few. A historical example of this type of regulation is the Corn Laws, which artificially controlled the influx of grain to England via tariffs and duties in order to artificially enhance domestic grain production for the benefit of the landed aristocracy.[4] The Corn Laws, repealed Robert Peel and other crusading classical liberals of the 19th century, exacerbated famine and economic struggle for the great mass of British citizens. While it is true that Smith vehemently opposed legislation like the Corn Laws, it is certain he also opposed negative regulations or measures that are repealed and leave the populace’s life, liberty, and property in jeopardy. Smith, for instance, advocated for some social welfare programs in his day, arguing that a hallmark of a civilized society is taking care of the less fortunate: “What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” De-regulation and the privatization of public institutions then, does not always lead to increased liberty and prosperity in all cases, as the impediments removed are often only a hindrance to certain special interests. Smith was cognizant of the way laws could be misconstrued to not fulfill the spirit in which they were initially eschewed, by both the crafting of new laws and the removal of already existing ones and thus, deliberation was vital in each particular circumstance.

What Did Smith Actually Advocate?

Smith’s central thesis was that under conditions of perfect liberty, free enterprise would lead to perfect equality. Far from an idealist, Smith understood that perfect liberty had never—and could never—exist on earth, as the nature of political and economic power would never allow that to happen. Still, Smith criticized the way in which governments across Europe simultaneously limited and enhanced competition in various trades by not leaving things “at perfect liberty.” By meddling in commercial affairs, governments circumvented organic market processes that would otherwise regulate the “circulation of labor and stock.” In a free market, Smith argued that in order to earn a profit, producers had to offer quality goods at reasonable prices, in order to sell their goods to consumers. Hence for Smith, market competition—free from arbitrary coercive measures like tariffs, duties, and barriers to entry—would always benefit the consumer rather than the producer.

The Invisible Hand

Adam Smith’s famous “Invisible Hand” is not so mysterious once the groundwork for his philosophy has been laid. Smith’s so-called Invisible Hand is simply the byproduct of unconscious market processes. It is as he wrote, “by pursuing his own interest he frequently promotes that of the society more effectually than when he intends to promote it . . . every individual . . . can . . . judge much better than any statesman or lawgiver.” For Smith, self-interest is the vehicle by which markets evolve and ultimately move forward. Smith, like other classical liberals, believed human beings to be naturally self-interested, seeking primarily their own aggrandizement. Competition in the public arena, Smith asserted, would actually serve to make individuals less selfish, as they had to account for the wants and needs of other people. Consider that in the absence of coercive apparatuses, one individual must offer something of value to another individual if the former individual is to profit. In doing so, the former individual must transcend his or her self-infatuation by considering the latter individual’s needs. In this way, the “Invisible Hand” serves to make people better and more just. Governments and merchants however, seek to circumvent this organic process by imposing arbitrary measures, aimed at stymieing free enterprise. In the modern age, propaganda and advertising seek to subvert the rational faculty of the consumer in order to stir the consumer to act in a way that is of benefit to the seller, but not necessarily mutually beneficial to both parties. Adam Smith’s Invisible Hand then is based on the assumption that human beings are rational and will act accordingly, though a critic may contend that this is frequently not the case.

A Resurgence of Mercantilism in the 20th Century

There has been in recent times a resurgence of mercantilist measures enacted by governments worldwide. While the British government assisted the East India Company militarily in the distant past, so too has the United States government in favor of its own multi-national corporations. One such example, was the 1954 Guatemalan Coup, in which the CIA came to the aid of the United Fruit Company by orchestrating the overthrow of a democratically elected government trying to nationalize its resources.[5] Since the turn of the 20th century, it seems the modern nation state intervenes frequently in favor of its corporate interests: a clear return the days of mercantilist interventionism.

On main street USA, a relatively benign manifestation of mercantilism is the frequency with which utility and telecommunication companies are granted exclusive monopolies over entire geographical jurisdictions, barring them from market competition which would—in Smith’s estimation—benefit the consumer.[6] In any case, modern utility and telecom companies utilize governmental authority to uphold localized monopoly by preventing competition: a clear harbinger of the resurgence of mercantilism.

The Affordable Care Act, heralded as “universal healthcare” by appealing to misinformed human empathy, was crafted by the masters of man in more recent times, who utilized the coercive power of the mammoth federal government to impose an individual mandate to purchase health insurance upon United States citizens.[7] In doing so, insurance companies were able to enrich themselves, while simultaneously squashing competition from smaller carriers.[8] In the healthcare industry, long gone are the days of free market competition, absent so-called safety regulations imposed by big business and its henchmen: big brother. Thankfully however, the individual penalty was recently eliminated. Remaining on the topic of healthcare, consider that it was the masters of man who founded the AMA and ADA, during the so-called “Progressive” Era.[9] Consider that in the most recent economic downturn of 2008, bad loans granted by big banks caused the economy to spiral downward.[10] These banks then—rather than pay for the foolishness of their own actions (whether intentional or otherwise)—were instead bailed out by big brother, who came to their aid at the expense of the already maligned taxpayer.[11]

With the imposition of tariffs on imports like steel, aluminum, and appliances manufactured in other countries in order to rectify America’s trade deficit, the Trump administration—with the backing of misinformed Americans—declared mercantilist policy mainstream once again. Of course the tariff policy resulted in retaliatory measures from other nations which in one instance, resulted in a $12 billion exacerbation at the expense of the general public, whereby taxpayer funds were then redistributed to agricultural businesses in 2018 negatively impacted by Trump’s tariff.[12] Similarly, as has been illuminated, the modern trade agreements which President Trump has drawn to the forefront, provide for the circulation of capital and stock, but not labor.[13] The result of this mercantilist policy is that while business moguls may move freely across borders, workers cannot. In this policy, the common man suffers while the merchant oligarch—who is the architect of the policy in question—gains immensely. All of these developments and more amount to what can be classified as crony capitalism.

Crony Capitalism and Mercantilism Present, In Essence, the Same Detriment to Liberty

In its very essence, crony capitalism is actually the reappearance of mercantilism. Once more, the “vile masters of man” are enlisting the state to do their bidding, this time under the guise of “capitalism.” Capitalism, a derogatory term used to denote the type of cronyism with which we associate the modern corporate and industrial order, was coined by Karl Marx in Das Capital. “Capitalists” such as Adam Smith, Thomas Jefferson, and other classical liberals, would be repulsed to learn of the way in which the captains of industry have successfully married state resources and power with their own personal desires. Hence Adam’s Smith critique of the mercantile economy of early-modern Europe is as pertinent today as ever, as the world regresses from liberalism into what is in essence centralized neo-mercantilism. Perhaps it is naive to think the pernicious vestiges of mercantilism were ever shed, due to intervention by the masters of man in every age, whose lust for power and material wealth eviscerates all who dare stand in the way as Smith presciently elucidated nearly 250 years ago.

[1] National Army Museum, “Opium War“; Brian Duignan, “5 Fast Facts About the East India Company,” Encyclopedia Britannica, n.d.; William Dalrymple, “The East India Company: The original corporate raiders,” The Guardian, March 4, 2015.

[2] Murray N. Rothbard, “Mercantilisme as the Economic Side of Absolutism,” Mises Institute, December 26, 2017.

[3] Tejvan Pettinger, “What happened to the Spanish Gold from the Incas?Economics Help, September 5, 2016.

[4] n.a., Encyclopædia Britannica, s.v. “Corn Law,” Encyclopædia Britannica, Inc., March 20, 2019.

[5] Billy Perrigo, “The devastating effects of American intervention in Guatemala,” The Panoptic, November 19, 2016.

[6] John Farrell, “Utility monopolies holding on to their power,” Rapid Shift, August 1, 2017; Richard Greenfield, “How the cable industry became a monopoly,” Fortune, May 19, 2015.

[7] Andrew Stiles, “Obamacare and Its Cronies,” National Review, December 3, 2013.

[8] Robert Lenzner, “ObamaCare Enriches Only The Health Insurance Giants and Their Shareholders,” Forbes, October 1, 2013; Alyene Senger, “Lack of Competition in Obamacare’s Exchanges: Over Half of U.S. Has Two or Fewer Carriers,” The Heritage Foundation, November 8, 2013.

[9] E. Richard Brown, Rockefeller Medicine Men: Medicine and Capitalism in America (Berkeley and Los Angeles, CA: University of California Press, 1979); William L. Anderson, “The Progressive Era,”, June 14, 2006.

[10] Mike Collins, “The Big Bank Bailout,” Forbes, July 14, 2015.

[11] Anthony Randazzo, “Trillion Dollar Bailouts Equal Crony Capitalism,” Reason, December 9, 2011.

[12] Julie Hirschfield and Ana Swanson, “To Ease Pain of Trump’s Trade War: $12 Billion in Aid for Farmers,” The New York Times, July 24, 2018.

[13] Gary Younge, “Penalising the poor,” The Guardian, March 19, 2001.


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