The Ideas of The Fourth Chapter of Adam Smith's Wealth of Nations

Adam Smith’s Wealth of Nations, chapter four is an interesting read on the Adams Smith ideas on foreign trade, about its flaws and suggestions for improvement. Adam openly condemns and indicates the faults in economic policies and models which were introduced by economists before his time. He believed that those policies were working against the welfare of the society contributing nothing towards economic growth. Smith was a strong critic of the traditional mercantile system of trade, a system which solely focused on gold and silver and money as a measure of wealth. Smith believed that the traditional mercantile system was immature with a weak foundation. He accused the gold and silver trade to shake the balance of trade of any country.

Smith does not provide deep insights into why the wealth consisting of money, gold, and silver holds no importance. He states, “ It would be ridiculous to go about seriously to prove that wealth does not consist in money or in gold and silver’’ (Smith, Adams. The wealth of nations). In order to elaborate his claim, Smith presents an example of sheep and money [1], general thinking among people is that a country with a lot of money is richer as compared to a country with a lot of sheep. Smith puts a lot of effort into proving the assumption wrong. Smith stressed on the fact the money as a form of wealth does not have a strong backbone if it is not contributing to improving the economy. Money, gold or silver that cannot buy actual good does not contribute to economic growth, therefore, countries with strict rules on making a bottleneck for money flow out of the country will create problems for itself. Smith brings our attention to the concept of balance of trade. This balance is important to prevent the smuggling of money abroad. In the words of Smith “….that this exportation could only be prevented by a proper attention to, what they called, the balance of trade” (Smith, Adams. The wealth of nations). The balance of trade is important for the overtrading to occur. Smith not only highlighted the idea of exporting more goods than importing to make a profit (by restricting the imports) but also keeping the exports under control. Profit flow coming in sometimes leads to overtrading, which means there are not enough goods available for domestic use. This ultimately created scarcity of money in the society. Smith in the first chapter aggressively censures the mercantile system. One of the main disadvantages of the system is the trade between long-lasting gold, silver or money with perishable commodities. He enforces the point by giving an example of the trade of durable hardware from England with Wine from France [2].

Smith focuses on the restraints used by the mercantile system on the import of good from foreign countries if they can be or being produced in the home country. High duties on imports of such goods or absolute prohibitions of these goods would help boom the local industry of those products. This, in turn, creates a monopoly in favor of the local industry as the consumers have no other choice but to purchase domestically. The monopoly created by a few companies in the market can be dangerous in terms of price fluctuations as the companies can set price to make excessive. Smith believed that the enforcement of such policies by the government is taking into consideration one side of the story by totally neglecting market demand and consumer choices. He brilliantly explains his thoughts by giving examples of various industries including silk, linen [3] etc. and the kind monopoly they have created in the market. In the words of Smith, “.....a monopoly against their countrymen” (Smith, Adams. The wealth of Nations). People, in general, try to find the best possible option available in terms of price and the ease/convenience with which they can obtain the good, therefore enforcement of such restraints would not benefit the people. Smith agrees that for the growth of society every individual is selfish when it comes to his or her own interest, “ Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command” (Smith, Adams. The wealth of Nations). 

Smith also argues about the fact that increasing the taxes discourages the consumer to import that particular good but the mercantile system ignores the effect it has on the generation of revenue through customs. On the other hand, it seems like Smith agrees with a few results of such restraints on the imported goods. Increase in the local industry results in the creation of new jobs for the locals. Smith also emphasized the importance of these restraints for the development of some vital industries for the country especially arms and ammunition industry. Smith’s background from Great Britain helps us make understand why he gives so much importance to the defense/military industry. 

Great Britain at that time had colonies all over the world and for that the government was spending a lot of money of resources on the defence industry. Smith being from a privileged background would sometimes go on tours all across the world with the Navy to gather his ideas.Imposing taxes on foreign goods can be favorable when similar goods produced in the home country are also being taxed. Taxes on both local and imported goods cancel out each other thus providing a price comparison opportunity for the consumers.

Smith also believed in the idea of freedom of choice in which the general public can choose between imported and local goods. In order to make sure that people get that opportunity taxes and absolute prohibitions would have to be a flexible and temporary thing. He was in favor of a balance between export and import rather than completely neglecting one part. Smith believed that it was the right of every citizen to choose the product he wants.

Smith raised some good points both in favor and against the restraints on importing goods but we see that he makes a lot of assumptions based on the economy of Great Britain at that time. Most of the policies and examples that he presented were linked with Britain at that time, therefore concrete evidence is required to before implementing any of his theories. Due to his relationship with Great Britain, his ideas might seem a little narrow as they were aimed at the economic growth of Great Britain but his ideas lay the basis and importance of International trade between different countries and how countries are interdependent on each other.

Smith brings some strong arguments in support of a suitable balance of trade between countries. He believed that its outrageous to implement duties on importing good knowing that it is not in favor of the countries economy. Balance of trade occurs when the country is exporting and importing the equal amount at all times. It is almost impossible to have a perfect balance at all times, it might favor one country more than the other but the bottom line is that it will benefit both countries. From his readings it seems like Smith had a good idea that no country has enough resources to completely self- sustain themselves hence trade of commodities, public goods, services etc. is vital for a healthy economy. Smith favored the idea of free trade zones which will allow exporting and importing goods between countries, especially neighboring countries a common practice. Free trade market is a big advantage for all the countries which are a part of it, as it allows them to export resources that they have in excess and import the ones they need to sustain. Unlike other writers Adam Smith, travelled a lot with the English Navy at that time therefore, he knew the importance of good relations between countries or colonies at that time. Export and import with minimum restraints build up those good relations along with economic growth. It is interesting to see how Adam Smith’s ideas on trade were so ahead of their time in comparison with other writers before him. His support for open trade between countries comes from the fact that monopoly created from high taxes and other restraints would eventually be disastrous for the common man.