“The laws concerning corn may everywhere be compared to the laws concerning religion. The people feel themselves so much interested in what relates either of their subsistence in this life, or to their happiness in a life to come, that government must yield to their prejudices, and, in order to preserve the public tranquillity, establish that system which they approve of. It is upon this account, perhaps, that we so seldom find a reasonable system established with regard to either of those two capital objects.” (WN, IV.v.b.40)

Adam Smith concludes Book IV, Chapter 5 of The Wealth of Nations with his famous “Digression concerning the Corn Trade and Corn Laws.” Don’t be fooled by the word “digression” in this subtitle, however. Here, Smith makes three points that are timeless: (1) he defends middlemen in the grain trade; (2) he explains the economics of famines; and (3) he explains the wealth of nations, i.e. why some countries are poor, while others are wealthy. In short, if I could read only one section of Smith’s magnum opus, this “digression” might be it!

1. Smith’s solution to the middleman paradox. Smith begins his digression with a paradox: “The interest of the inland dealer, and that of the great body of the people, how opposite soever they may at first sight appear, are, even in years of the greatest scarcity, exactly the same.” (WN, IV.v.b.3) But how can this paradox be true? How can the private interest of middlemen, who want to obtain the highest possible price for their products, be aligned with the public interest of consumers, who want to pay the lowest possible price? Smith’s solution to this paradox is as elegant as it is surprising and is therefore worth quoting in full:

“Without intending the interest of the people, he [the middleman] is necessarily led, by a regard to his own interest, to treat them, even in years of scarcity, pretty much in the same manner as the prudent master of a vessel is sometimes obliged to treat his crew. When he foresees that provisions are likely to run short, he puts them upon short allowance. Though from excess of caution he should sometimes do this without any real necessity, yet all the inconveniences which his crew can thereby suffer are inconsiderable in comparison of the danger, misery, and ruin to which they might sometimes be exposed by a less provident conduct. Though from excess of avarice, in the same manner, the inland corn merchant should sometimes raise the price of his corn somewhat higher than the scarcity of the season requires, yet all the inconveniences which the people can suffer from this conduct, which effectually secures them from a famine in the end of the season, are inconsiderable in comparison of what they might have been exposed to by a more liberal way of dealing in the beginning of it. The corn merchant himself is likely to suffer the most by this excess of avarice; not only from the indignation which it generally excites against him, but, though he should escape the effects of this indignation, from the quantity of corn which it necessarily leaves upon his hands in the end of the season, and which, if the next season happens to prove favourable, he must always sell for a much lower price than he might otherwise have had.” (WN, IV.v.b.3; my emphasis)

In other words, middlemen perform a crucial economic function: they set prices, and they have a powerful and self-regulating economic incentive — the profit motive — to set their prices based on how plentiful or scarce the supply of grain is at any given time relative to consumer demand. How so? Because in order to maximize their profits, middlemen must ensure that the supply of grain lasts the entire season: if they set the price of grain too low, their supplies of grain will be wiped out too soon, resulting in a famine. If they set the price too high, however, supply will exceed demand and they will eventually have to sell at a loss because grain is a semi-perishable commodity.

2. The economics of famine. Next, Smith presents another paradox: he shows how well-intentioned government policies designed to prevent or ameliorate famines always end up making matters worse. How so? According to Smith, price controls are counterproductive because they interfere with the freedom of middlemen to set prices, and forcing prices to stay low can turn a localized shortage into a full-blown famine by discouraging middlemen from bringing food to market in the first place:

“When the government, in order to remedy the inconveniences of a dearth, orders all the dealers to sell their corn at what it supposes a reasonable price, it either hinders them from bringing it to market, which may sometimes produce a famine even in the beginning of the season; or if they bring it thither, it enables the people, and thereby encourages them to consume it so fast as must necessarily produce a famine before the end of the season. The unlimited, unrestrained freedom of the corn trade, as it is the only effectual preventative of the miseries of a famine, so it is the best palliative of the inconveniences of a dearth; for the inconveniences of a real scarcity cannot be remedied, they can only be palliated. No trade deserves more the full protection of the law, and no trade requires it so much, because no trade is so much exposed to popular odium.” (WN, IV.v.b.7; my emphasis)

3. The wealth and dearth of nations. Smith concludes his digression with a ringing defense of property rights (“security”) and natural liberty (“freedom”):

“The improvement and prosperity of Great Britain, which has been so often ascribed to those laws [regulating grain trade], may very easily be accounted for by other causes. That security which the laws in Great Britain give to every man that he shall enjoy the fruits of his own labour is alone sufficient to make any country flourish, notwithstanding these and twenty other absurd regulations of commerce …. The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security is so powerful a principle that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations; though the effect of these obstructions is always more or less either to encroach upon its freedom, or to diminish its security. In Great Britain industry is perfectly secure; and though it is far from being perfectly free, it is as free or freer than in any other part of Europe.” (WN, IV.v.b.43; my emphasis)

In short, a country like Britain is wealthy not because of its mercantilist and protectionist policies, but because people are allowed to enjoy the “fruits of their own labour.” (WN, IV.v.b.43) That is, Britain is wealthy in spite of its mercantilist and protectionist policies! Again, now so? Because our innate or built-in desire to “better [our] own condition” is so strong that we are able to figure out a way around these laws and regulations! This observation, however, presents yet another paradox: what is the optimal amount of law? On the one hand, some laws are necessary in order to protect property rights and freedom, but at the same time, laws can also do more harm than good. (To be continued …)