To my North American readers, Happy Presidents’ Day! Now, let’s pick up where we left off, with Chapter 3 of Book IV The Wealth of Nations. Recall that Adam Smith launches his attack on mercantilism and protectionism in Book IV of his magnum opus. To this end, Smith identifies two types of restraints on trade with foreign nations:

“First, restraints upon the importation of such foreign goods for home consumption as could be produced at home, from whatever country they were imported.

“Secondly, restraints upon the importation of goods of almost all kinds from those particular countries with which the balance of trade was supposed to be disadvantageous.” (WN, IV.i.37-38)

Accordingly, Chapter 2 of Book IV reveals the many mercantilist fallacies in favor of the first kind of restraint — i.e. economic protectionism or “restraints upon the importation of such foreign goods for home consumption as could be produced at home” — while Chapter 3 (available here), which we explore in this post, exposes the truth about “balance of trade” arguments. [1] In other words, Chapter 3 is directed towards Donald Trump and his sundry MAGA followers!

But what is the main difference between these two types of justifications in favor of restraints of trade? Among Adam Smith’s many deep insights in these first three chapters of Book IV — e.g. the absurdity of the doctrine of the balance of trade, the conspiracy of the merchants, the invisible hand of self-interest, etc., etc. — the one that is most surprising to me is Smith’s analysis in Chapter 3 of the cultural politics of the doctrine of the balance of trade. To see why, let’s go back for a moment to Chapter 1 of Book IV. In that chapter, Smith explores the economics of the balance of trade doctrine, and he shows why this protectionist doctrine is bullshit: restrictions on trade retard economic growth and thus make us poorer.

So, what does Smith add to his analysis of the doctrine of the balance of trade in Chapter 3? That is, what does he say in Chapter 3 that hasn’t already been said in the previous two chapters of Book IV of his magnum opus? Simply put, Smith makes an astute political observation in Ch. 3: restraints on free trade based on outright economic protectionism are motivated by “private interest and the spirit of monopoly” (WN, IV.iii.1), but restraints on trade based on “balance of trade” arguments are, at bottom, motivated by racism or xenophobia, i.e. “national prejudice and animosity.” (ibid.)

In other words, “balance of trade” arguments are not only economic nonsense; they are morally evil and racist! Here (yet again!) is another reason why Adam Smith is still relevant today. Do you want to be an effective “anti-racist”, and not just virtue-signal about being so? For Smith, the most effective way of fighting racism is by exposing the folly and futility of “balance of trade” arguments, by supporting free trade!

[1] That is why Chapter 3 of Book IV of The Wealth of Nations is titled “Of the Extraordinary Restraints upon the Importation of Goods of almost all Kinds from those particular Countries with which the Balance was supposed to be disadvantageous.”