Nota bene: I discuss Adam Smith’s first “dire warning” here.

As promised (see here and here), I will now turn to the last part of Adam Smith’s 79-page pamphlet (Part #13, pp. 47-79), 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). This part, by far the longest section of Smith’s 1784 pamphlet (it consists of 40 paragraphs spread across 33 pages), was later inserted into “Part Third” of Chapter 1 of Book V of all subsequent editions of Smith’s Wealth of Nations, where Smith surveys “Public Works and Public Institutions”.

In summary, in the first two editions of The Wealth of Nations (1776, 1778), “Part Third” of Book V, Chapter 1 begins with a survey of public goods, such as roads and canals. According to Smith, one of three main duties of government (along with national defense and justice) is the provision of such public goods in order to promote “commerce in general” (my emphasis). The last part of Smith’s 1784 pamphlet, however, added a new subsection to “Part Third” of Book V, Chapter 1, which is titled “Of the Public Works and Institutions which are necessary for facilitating particular Branches of Commerce” (my emphasis). Part #13 begins thus:

“The object of the public works and institutions above mentioned [e.g. roads and canals] is to facilitate commerce in general. But in order to facilitate some particular branches of it, particular institutions are necessary, which again require a particular and extraordinary expense. (Smith 1784, paragraph 1 on p. 47)

So, what are these “particular branches” of commerce that “require a particular and extraordinary expense” by the government? Alas, one is the slave trade:

“Some particular branches of commerce, which are carried on with barbarous and uncivilised nations, require extraordinary protection. An ordinary store or counting-house could give little security to the goods of the merchants who trade to the western coast of Africa. To defend them from the barbarous natives, it is necessary that the place where they are deposited should be, in some measure, fortified.” (Smith 1784, para. 2 on p. 47)

More generally, these “particular branches” of commerce also encompass the activities of any firm that does business overseas. Here (para. 2), Smith surveys three specific examples of overseas trading in the second paragraph of Part #13: Indostan, Turkey, and Russia. Smith writes:

“The disorders in the government of Indostan have been supposed to render a like precaution necessary even among that mild and gentle people; and it was under pretence of securing their persons and property from violence that both the English and French East India Companies were allowed to erect the first forts which they possessed in that country. Among other nations, whose vigorous government will suffer no strangers to possess any fortified place within their territory, it may be necessary to maintain some ambassador, minister, or counsel, who may both decide, according to their own customs, the differences arising among his own countrymen, and, in their disputes with the natives, may, by means of his public character, interfere with more authority, and afford them a more powerful protection, than they could expect from any private man. The interests of commerce have frequently made it necessary to maintain ministers in foreign countries where the purposes, either of war or alliance, would not have required any. The commerce of the Turkey Company first occasioned the establishment of an ordinary ambassador at Constantinople. The first English embassies to Russia arose altogether from commercial interests. The constant interference which those interests necessarily occasioned between the subjects of the different states of Europe, has probably introduced the custom of keeping, in all neighbouring countries, ambassadors or ministers constantly resident even in the time of peace. This custom, unknown to ancient times, seems not to be older than the end of the fifteenth or beginning of the sixteenth century; that is, than the time when commerce first began to extend itself to the greater part of the nations of Europe, and when they first began to attend to its interests.” (para. 2 on pp. 47-48, my emphasis)

In other words, when a private company does business in a foreign country it may have to take pro-active measures, such as the building of fortresses, to protect its agents and property overseas. But Smith also recognizes that most foreign governments are jealous of their sovereignty and won’t allow outside companies to take such pro-active security measures on their soil. As a result, Smith concludes that the British government will have to establish embassies and appoint ambassadors in these foreign countries in order to protect the economic interests of its citizens and firms who are doing business overseas.

But how should these overseas embassies and ambassadors be financed? Smith proposes a kind of “user fee” in the third paragraph of Part #13:

“It seems not unreasonable that the extraordinary expense which the protection of any particular branch of commerce may occasion should be defrayed by a moderate tax upon that particular branch; by a moderate fine, for example, to be paid by the traders when they first enter into it, or, what is more equal, by a particular duty of so much per cent upon the goods which they either import into, or export out of, the particular countries with which it is carried on. The protection of trade in general, from pirates and freebooters, is said to have given occasion to the first institution of the duties of customs. But, if it was thought reasonable to lay a general tax upon trade, in order to defray the expense of protecting trade in general, it should seem equally reasonable to lay a particular tax upon a particular branch of trade, in order to defray the extraordinary expense of protecting that branch.” (para. 3 on pp. 48-49, my emphasis)

Simply put, it is the direct beneficiaries of Britain’s overseas embassies and ambassadors — i.e. the trading companies — who should pay for these public services, either by imposing “a moderate tax” or “a moderate fine” on them, or in the alternative, by imposing “a particular duty” on the imports and exports of those overseas trading companies.

So far, so good. In the fourth paragraph of Part #13, however, Smith makes the following ominous observation:

“The protection of trade in general has always been considered as essential to the defence of the commonwealth, and, upon that account, a necessary part of the duty of the executive power. The collection and application of the general duties of customs, therefore, have always been left to that power…. But in this respect, as well as in many others, nations have not always acted consistently; and in the greater part of the commercial states of Europe, particular companies of merchants have had the address to persuade the legislature to entrust to them the performance of this part of the duty of the sovereign, together with all the powers which are necessarily connected with it.” (para. 4 on p. 49, my emphasis)

That is, although the protection of overseas trade is one of the main duties of the government, overseas trading company have lobbied their home legislatures to allow them to assume this duty themselves! Next (para. 5 of Part #13), Smith presents the following dire warning about the dangers of self-regulation, an admonition that is still relevant today:

“These companies, though they may, perhaps, have been useful for the first introduction of some branches of commerce, by making, at their own expense, an experiment which the state might not think it prudent to make, have in the long run proved, universally, either burdensome or useless, and have either mismanaged or confined the trade.” (para. 5 on p. 49, my emphasis)

In short, the policy of giving these overseas trading companies the power to protect their own interests has “universally” proved to be “either burdensome or useless”! According to Smith, overseas trading companies with the power to self-regulate have “either mismanaged or confined” their overseas trade. But how is this possible? What happened to Smith’s invisible hand? Is unbridled capitalism really so bad? I shall turn to these crucial questions in my next post. (To be continued …)