prior probability

Thus far this past week (see here, here, here, here, and here), we have done a deep dive into paragraphs 1 to 53 of Part #12 of the pamphlet “Additions and Corrections to the First and Second Editions of Dr. Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations” (Smith 1784, pp. 23-46). But I have saved the best for last: the closing paragraph of Part #12 (paragraph 54). It is here, in this concluding paragraph to Part #12 of his 1784 pamphlet, that Adam Smith pulls back the green curtain, so to speak — like Dorothy’s dog Toto in The Wizard of Oz — to reveal the true villains of his story:

“It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interest has been so carefully attended to; and among this latter class our merchants and manufacturers have been by far the principal architects. In the mercantile regulations, which have been taken notice of in this chapter, the interest of our manufacturers has been most peculiarly attended to; and the interest, not so much of the consumers, as that of some other sets of producers, has been sacrificed to it.” (Smith 1784, p. 47)

On this note, compare the “Big Tech” firms of today, such as Apple, Google, Meta/Facebook, Microsoft, and OpenAI, to the evil economic “contrivers” of Smith’s day. Plus ça change, plus c’est la même chose!

But how is such a small group of nefarious “contrivers” — past and present — able to manipulate the legal system to put their private economic and legal interests ahead of those of the great majority of the public: consumers? Whatever happened to the consequentialist notion of “the greatest good for the greatest number”?

As it happens, Adam Smith anticipates Mancur Olson’s Logic of Collective Action by two centuries. Buried deep in his discussion of the wool market in England (see paragraph 34 on pp. 38-39 of Smith’s 1784 pamphlet), the Scottish scholar compares and contrasts cattle ranchers and sheep farmers (“graziers”) on the one hand with the manufacturers of leather and woollen goods on the other:

“Graziers separated from one another, and dispersed through all the different corners of
the country, cannot, without great difficulty, combine together for the purpose either of imposing monopolies upon their fellow citizens, or of exempting themselves from such as may have been imposed upon them by other people. Manufacturers of all kinds, collected together in numerous bodies in all great cities, easily can.” (Smith 1784, p. 38)

In other words, there is a market for political and legal favors just like there is a market for ordinary goods like wool, leather, and meat. Large and diffuse majorities — whether they be cattle ranchers, sheep farmers, or consumers — are unable to effectively band together to lobby the government to protect their interests because they are spatially dispersed across the country. (Implicit in the passage above is what Mancur Olson makes explicit: when a group is large and dispersed, the benefits to any individual member of the group of lobbying the government are small relative to the costs of banding together.) Small and geographically-concentrated groups, by contrast, are another story. They can more easily organize and band together than large and diffuse majorities can because the financial rewards for them are large. Simply put, the costs of banding together for small and concentrated groups are worth it.

Nota bene: I will be taking next week off, but starting on Monday, 27 July, I will turn my attention to the last separate substantive section of Smith’s 1784 pamphlet: Part #13.

Adam Smith concludes Part #12 of his 1784 pamphlet (paragraphs 49 to 54 on pp. 45-47) with a series of timeless observations that are worth quoting in full. First and foremost (para. 49), Smith puts his cards on the table:

“Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.” (Smith 1784, p. 45, my emphasis)

In other words, the economy should serve the people who buy goods, not the firms who make goods. Furthermore, Smith elevates this general principle into an economic axiom: “Th[is] maxim is so perfectly self-evident that it would be absurd to attempt to prove it.” (Id.)

But in light of his comprehensive survey of Britain’s protectionist laws (see, for example, my previous posts from this week), Smith concludes that “the mercantile system” inverts this “perfectly self-evident” axiom in the most perverse way imaginable. (See the rest of para. 49 as well as paras. 50 & 51.) Or in the immortal words of Adam Smith:

“But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.

“In the restraints upon the importation of all foreign commodities which can come into competition with those of our own growth or manufacture, the interest of the home-consumer is evidently sacrificed to that of the producer. It is altogether for the benefit of the latter that the former is obliged to pay that enhancement of price which this monopoly almost always occasions.

“It is altogether for the benefit of the producer that bounties are granted upon the exportation of some of his productions. The home-consumer is obliged to pay, first, the tax which is necessary for paying the bounty, and secondly, the still greater tax which necessarily arises from the enhancement of the price of the commodity in the home market.” (Id.)

Smith then dons his historian’s cap to provide a specific example of this perverse mercantile inversion (para. 52), the 1703 Methuen Treaty between England and Portugal:

“By the famous treaty of commerce with Portugal, the consumer is prevented by high duties from purchasing of a neighbouring country a commodity which our own climate does not produce, but is obliged to purchase it of a distant country, though it is acknowledged that the commodity of the distant country is of a worse quality than that of the near one. The home-consumer is obliged to submit to this inconveniency in order that the producer may import into the distant country some of his productions upon more advantageous terms than he would otherwise have been allowed to do. The consumer, too, is obliged to pay whatever enhancement in the price if those very productions this forced exportation may occasion in the home market.” (Id. at p. 46)

Next (para. 53), Smith not only unleashes another powerful barrage against British mercantilism (cf. his 26 October 1780 letter to Andreas Holt, where Smith describes the first two editions of The Wealth of Nation as “the very violent attack I had made upon the whole commercial system of Great Britain”); he launches a frontal assault against the pro-business logic of British colonialism. Smith’s attack against colonialism is so sweeping that it is worth quoting in full:

“But in the system of laws which has been established for the management of our American and West Indian colonies, the interest of the home-consumer has been sacrificed to that of the producer with a more extravagant profusion than in all our other commercial regulations. A great empire has been established for the sole purpose of raising up a nation of customers who should be obliged to buy from the shops of our different producers all the goods with which these could supply them. For the sake of that little enhancement of price which this monopoly might afford our producers, the home-consumers have been burdened with the whole expence of maintaining and defending that empire. For this purpose, and for this purpose only, in the two last wars, more than two hundred millions have been spent, and a new debt of more than a hundred and seventy millions has been contracted over and above all that had been expended for the same purpose in former wars. The interest of this debt alone is not only greater than the whole extraordinary profit which it ever could be pretended was made by the monopoly of the colony trade, but than the whole value of that trade, or than the whole value of the goods which at an average have been annually exported to the colonies.” (Id.)

But Smith saves his best for last (para. 54)! He identifies the “contrivers of this whole mercantile system”, the economic and political swindlers for whose benefit this perverse colonial/mercantile system was erected and is still kept in place. Stay tuned, for we will reveal these con men by name in my post! (To be continued …)

As I mentioned in a previous post (see here), Adam Smith surveys a wide variety of British mercantilist laws in Part #12 of his 1784 pamphlet, but he devotes most of his time and energy here to wool (see paragraphs 17 to 32 on pp. 29-38) and to artisans (see paragraphs 44 to 48 on pp. 43-45). We saw Smith’s critique of Britain’s ban on wool exports in yesterday’s post. Today, we will not only examine his substantive critique of the restrictions on artisans; we will also see another side of the Scottish scholar-cum-customs commissioner — what I like to call the sarcastic Adam Smith — for Smith’s sarcasm will be on full display in this part of his work.

To begin, Smith makes the following general point in paragraph 43 of Part #12: “The exportation … of the instruments of trade, properly so called, is commonly restrained, not by high duties, but by absolute prohibitions.” (Smith 1784, p. 43, my emphasis) Then, in the very next paragraph, Smith makes the following wry but witty observation:

“When such heavy penalties [are] imposed upon the exportation of the dead instruments of trade, it could not well be expected that the living instrument, the artificer, should be allowed to go free.” (Id.)

Here, Smith surveys two British laws restricting the free movement of artisans to other countries. (See paragraphs 44 to 46 on pp. 43-44 of Smith’s 1784 pamphlet.) In summary, the goal of these laws was to prohibit skilled workers or “artificers” from leaving the country. For example, if anyone tricked or enticed an artisan to teach his trade in another country, the trickster or enticer could be punished with a large fine and imprisonment.

After completing his survey of these onerous laws — and showing how the penalties in these measures became much more strict over time — Adam Smith makes the following scathing remark (para. 47):

“It is unnecessary, I imagine, to observe how contrary such regulations are to the boasted liberty of the subject, of which we affect to be so very jealous; but which, in this case, is so plainly sacrificed to the futile interests of our merchants and manufacturers.” (Smith 1784, p. 44)

Smith’s sarcastic reference to the “boasted liberty” of Bristish subjects is pure gold, but Smith is not just denouncing the patent unfairness of these restrictions on artisans. As I read this passage (para. 47), he is also, perhaps unwittingly, making a much more deeper and profound point about the relationship between law and liberty. A law that restricts the ability of artisans to work overseas, by definition, restricts their liberty, i.e. their freedom of choice. But the same thing can be said about any law more generally, for all laws limit our liberties by restraining our freedom of choice, telling what we can or cannot do.

Furthermore, what Smith is sarcastically objecting to here is not just the substance of the restrictions on the liberty of artisans or the scale of the penalties. What most angers Smith is how the fundamental natural rights of artisans are literally being “sacrificed” on the economic altar of the “futile interests” of the merchants and manufacturers who lobbied for these laws in the first place.

But Smith saves his sarcastic best for last (paragraph 48) to describe the supposed “laudable motive” of these restrictions:

“The laudable motive of all these regulations is to extend our own manufactures, not by their own improvement, but by the depression of those of all our neighbours, and by putting an end, as much as possible, to the troublesome competition of such odious and disagreeable rivals. Our master manufacturers think it reasonable that they themselves should have the monopoly of the ingenuity of all their countrymen. Though by restraining, in some trades, the number of apprentices which can be employed at one time, and by imposing the necessity of a long apprenticeship in all trades, they endeavour, all of them, to confine the knowledge of their respective employments to as small a number as possible; they are unwilling, however, that any part of this small number should go abroad to instruct foreigners.” (Smith 1784, pp. 44-45)

After denouncing these restrictions on artisans, Smith concludes Part #12 of his pamphlet with some timeless observations about “the mercantile system” overall. More specifically, cui bono? Who benefits from mercantilism? And who are its biggest losers? (To be continued …)

¡Vamos Argentina! Thus far this week (see here and here), we have explored the penultimate part of Adam Smith’s 1784 pamphlet Additions and Corrections to the First and Second Editions of Dr. Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations: Addition #12.

Here, as we saw in my previous post, Smith surveys Britain’s complex web of mercantilist laws, and among the laws Smith devotes the most space to are the laws against the exportation of wool. After describing these laws in tedious detail, Smith reveals the ostensible rationale of these protectionist measures. According to Smith, the rationale for these protectionist laws is twofold. One is quality control:

“Our woollen manufactures, in order to justify their demand of such extraordinary restrictions and regulations, confidently asserted that English wool was of a peculiar quality, superior to that of any other country; that the wool of other countries could not, without some mixture of it, be wrought up into any tolerable manufacture; that fine cloth could not be made without it; that England, therefore, if the exportation of it could be totally prevented, could monopolize to herself almost the whole woollen trade of the world; and thus, having no rivals, could sell at what price she pleased, and in a short time acquire the most incredible degree of wealth by the most advantageous balance of trade.” (Smith 1784, pp. 33-34)

The other rationale is to keep domestic wool prices low: “the effect of these regulations has been to depress the price of English wool, not only below what it naturally would be in the present times, but very much below what it actually was in the time of Edward III.” (Id. at p. 34) Furthermore, although Smith is skeptical about the quality control argument (see points #1 and #3 below), with respect to the price argument he readily concedes that these protectionist laws have worked: “To depress the price of this commodity below what may be called its natural and proper price was the avowed purpose of those regulations; and there seems to be no doubt of their having produced the effect that was expected from them.” (Id.)

But Smith is just getting started, for he is now ready to launch an all-out attack against these protectionist laws. In summary, Smith makes three points:

1. First off, Smith calls bullshit on the quality control argument: “It is, however, so perfectly false that English wool is in any respect necessary for the making of fine cloth that it is altogether unfit for it. Fine cloth is made altogether of Spanish wool. English wool cannot be even so mixed with Spanish wool as to enter into the composition without spoiling and degrading, in some degree, the fabric of the cloth.” (Id.)
2. Next, with respect to the second rationale (to keep the price of domestic wool low), Smith dons his economist’s cap, so to speak, and explains how the decrease in the price of wool has also had the effect of reducing the supply and production of wool. (See paragraph 26 on pp. 34-36 of Addition #12.)
3. Another effect of this reduction of price of domestic wool is that the quality of English wool has, in fact, gotten worse in relative terms:

“The degradation in the quality of English wool, if not below what it was in former times, yet below what it naturally would have been in the present state of improvement and cultivation, must have been, it may perhaps be supposed, very nearly in proportion to the degradation of price.” (Para. 27 on p. 36)

(As an aside, notice again how sophisticated and nuanced Smith’s third point is. He is not saying that the quality of English wool has declined in absolute terms; instead, he is asking to imagine what the quality of English wool would be like in a world in which free trade were allowed.)

Next, Smith notes that the overall effect of these protectionist measures has been negligible at best. According to Smith, any economic benefits that these laws may have provided to the manufacturers of woollen goods have been offset by the economic harm done to the growers of wool:

“The violence of these regulations, therefore, seems to have affected neither the quantity nor the quality of the annual produce of wool so much as it might have been expected to do (though I think it probable that it may have affected the latter a good deal more than the former); and the interest of the growers of wool, though it must have been hurt in some degree, seems, upon the whole, to have been much less hurt than could well have been imagined.” (Para. 28 on pp. 36-37)

And here is where things get interesting. Smith is not just an economist; he is a political economist, and Smith next makes a timeless observation about the perverse politics of protectionism:

“To hurt in any degree the interest of any one order of citizens, for no other purpose but to promote that of some other, is evidently contrary to that justice and equality of treatment which the sovereign owes to all the different orders of his subjects. But the prohibition certainly hurts, in some degree, the interest of the growers of wool, for no other purpose but to promote that of the manufacturers.” (Para. 30 on p. 37, my emphasis)

In other words, instead of picking winners and losers, the government should create a level playing field for all market actors — in the case, the growers of wool and the manufacturers of woollen goods. Furthermore, this idea of a level playing field is a two-way street, for everyone has a duty to pay their fair share of taxes: “Every different order of citizens is bound to contribute to the support of the sovereign or commonwealth.” (Para. 31 on p. 37)

Smith then combines his insights about a level playing field and proposes a new policy on wool exports: tax, don’t ban. Instead of prohibiting the exportation of wool altogether, the government should impose a small tax on such exports:

“A tax of five, or even of ten shillings upon the exportation of every ton of wool would produce a very considerable revenue to the sovereign. It would hurt the interest of the growers somewhat less than the prohibition, because it would not probably lower the price of wool quite so much. It would afford a sufficient advantage to the manufacturer, because, though he might not buy his wool altogether so cheap as under the prohibition, he would still buy it, at least, five or ten shillings cheaper than any foreign manufacturer could buy it, besides saving the freight and insurance, which the other would be obliged to pay. It is scarce possible to devise a tax which could produce any considerable revenue to the sovereign, and at the same time occasion so little inconveniency to anybody.” (Para. 31 on p. 37)

To the point, taxes are “lesser evil” than outright bans. Why? To begin with, because outright bans are totally futile:

“The prohibition [of wool exports], notwithstanding all the penalties which guard it, does not prevent the exportation of wool. It is exported, it is well known, in great quantities. The great difference between the price in the home and that in the foreign market presents such a temptation to smuggling that all the rigour of the law cannot prevent it. This illegal exportation is advantageous to nobody but the smuggler.” (Para. 32 on pp. 37-38)

Allowing an open and free market in wool subject to a reasonable tax, by contrast, has an additional advantage. According to Smith, the government could use the revenue generated from the wool tax to reduce or eliminate “the imposition of some other, perhaps, more burdensome and inconvenient taxes”:

“A legal exportation subject to a tax, by affording a revenue to the sovereign, and thereby saving the imposition of some other, perhaps, more burdensome and inconvenient taxes might prove advantageous to all the different subjects of the state.” (Para. 32 on p. 38)

In short, Addition #12 of Smith’s 1784 pamphlet is not just a dull survey of Britain’s complex web of mercantilist laws; it also contains a master class on political economy. Smith not only recognizes that taxes and regulations are two of the main tools a government can use to change behavior — a tax raises the cost of an action to discourage it, while a regulation imposes legal penalties to control or ban specific actions outright — Smith also explains why taxation is a lesser evil compared to regulation.

Nota bene: In my next post, we will turn our attention to Adam Smith’s sarcastic critique of the laws restricting the free movement of artisans.

Happy Bastille Day, though I confess that I am rooting for España in today’s World Cup semi-final match in Arlington, Texas!

Now, picking up where we left off in my previous post, below is a comprehensive summary of Adam Smith’s survey of Britain’s complex web of mercantilist laws in Part #12 of Smith’s 1784 pamphlet (pp. 23-46). For reference, I have arranged this compilation into three separate categories as follows:

BRITISH LAWS ALLOWING OR PROMOTING THE IMPORTATION OF GOODS

• 24 George III, chap. 46 — foreign brown linen yarn
• 29 George III, chap. 15 — ditto
• 21st George II, chap. 30 — indigo from British plantations
• 4th George III, chap. 26 — hemp, or undressed flax, from British plantations
• 5th George III, chap. 45 — wood from America
• 9th George III, chap. 38 — raw silk from British plantations
• 2nd George III, chap. 50 — pipe, hogshead, and barrel staves and heading from British plantations
• 19th George III, chap. 37 — hemp from Ireland

BRITISH LAWS PROHIBITING OR DISCOURAGING THE EXPORTATION OF GOODS

• 3rd Edward IV — wool cards
• 39th Elizabeth — ditto
• 8th Elizabeth, chap. 3 — sheep, lambs, or rams
• 13th & 14th of Charles II, chap. 18 — wool
• 12th of Charles II, chap. 32, sect. 3 — ditto
• 7th and 8th of William III, chap. 28, sect. 4 — ditto
• 13th and 14th of Charles II, chap. 7 — raw hides and tanned leather, except in the shape of boots, shoes, or slippers
• various “old statutes of Edward III, Henry VIII, and Edward VI” — metals
• 25th George II — gum senega
• 5th George III, chap. 37 — ditto
• 14th George III, chap. 10 — ditto
• 7th & 8th of William III, chap. 20, sect. 8 — frames or engines for knitting gloves or stockings
• 14th George III, chap. 71 — tools used for the production of cotton, linen, woollen, and silk goods

BRITISH LAWS PROHIBITING ARTISANS FROM LEAVING THE COUNTRY

• 5th George I, chap. 27
• 23rd George II, chap. 13

DISCUSSION (PART 1 OF 3)

Combined, these laws present a nuanced, sophisticated, and (dare I say) “Marxian” picture of “the mercantile system”. For Smith, mercantilism is not just about promoting a favorable balance of trade by exporting finished goods or hoarding gold and silver. Mercantilism is also about raw materials! That is the pattern Smith brings to light in his meticulous survey of Britain’s complex web of mercantilist laws: the importation of raw materials is allowed or encouraged while their exportation is discouraged or strictly prohibited.

In addition, it is also worth noting that, of all the laws in his survey (see above), Smith has the most to say about the laws regulating the market for wool and the market for artisans: he devotes the most space to the ban on wool exports (see paragraphs 17 to 32 on pp. 29-38 of Smith’s 1784 pamphlet) and to the restrictions on artisans (see paragraphs 44 to 48 on pp. 43-45). Why did the legislature impose such strict and severe penalties for the exportation of wool? Why aren’t artisans allowed the freedom to relocate overseas? And what effect did these restrictions have in practice? As it happens, Adam Smith is at his best when he addresses these questions, so I will turn to Smith’s discussion of these restrictions in my next two posts. (To be continued …)

Bonus link: “Laws of the Game” (official rulebook of football/soccer). Bonus link #2: “In the United States, Every World Cup Team Is a Home Team” (NYT)

Nota bene: I will resume my series of blog posts on Adam Smith’s 1784 pamphlet on Monday, 13 July.

On this day (10 July) in 1962, the world’s first telecom satellite, Telstar 1, was launched by NASA from the Cape Canaveral Air Force Station in Florida. According to Wikipedia (see here), Telstar 1 remained active for only 7 months before it prematurely failed due to Starfish Prime, a high-altitude nuclear test conducted by the United States.

Although Telstar 1 is no longer operational, it remains in Low-Earth Orbit. Today, by contrast, there are over 10,000 active communications satellites in orbit! (See here or here, for example.) This is one reason why I have proposed replacing the current system of granting launch licenses for free with outer space auctions or an orbit congestion fee. See also here.

I concluded my survey of Part #11 of Adam Smith’s pamphlet “Additions and Corrections to the First and Second Editions of Dr. Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations” (Smith 1784, pp. 13-22) in my previous post. Next up is Part #12 (pp. 23-47), where Smith adds an entirely new chapter to his great treatise: Chapter 8 of Book IV of The Wealth of Nations (“Conclusion of the Mercantile System”). As it happens, I surveyed that chapter earlier this year as part of my commemoration of the 250th anniversary of the publication of Smith’s second magnum opus. (See my blog post from 3 March 2026: “The true villains in The Wealth of Nations“.) Yet I now see that Smith added this particular chapter between 1778 and 1784, i.e. while he was a Commissioner of Scottish Customs and Salt Duties, so I will start from scratch and explore this chapter in far greater detail starting on Monday, 13 July.