prior probability

THE IMMORTAL ADAM SMITH, PART 2

In my previous post, I walked us through the first two paragraphs of Book IV, Chapter 2 of Adam Smith’s Wealth of Nations. To recap, Smith concedes that restraints on foreign trade will benefit domestic producers, but at the same time, he leaves open an important question: what effect will trade barriers have on a country’s overall level of wealth? Today, I want to focus on the third paragraph of Book IV, Chapter 2, for it contains a crucial observation: wealth is a function of capital — an insight I like to call “Smith’s First Law“.

The father of economics defines “capital” as those things, such as tools, animals, land, etc., that can be used by workers to generate revenue. (See Book II, Chapter 1 of Smith’s magnum opus.) And for Smith, a country is only as rich or wealthy as the amount of productive “capital” she has: “The general industry of the society never can exceed what the capital of the society can employ” (Wealth of Nations, IV.2.iii). This simple yet profound observation is the essence of Smith’s First Law, but is it true? To prove this assertion, Smith draws a direct analogy between a small firm and a “great society” like the Kingdom of France or the Britain of his day:

“As the number of workmen that can be kept in employment by any particular person must bear a certain proportion to his capital, so the number of those that can be continually employed by all the members of a great society must bear a certain proportion to the whole capital of that society, and never can exceed that proportion.” (ibid.)

In other words, the number of employees a profitable firm can hire depends on the amount of “capital” that firm has under its control. But does this logic apply to a country’s economy as a whole? More specifically, what effect do protectionist laws and trade restrictions have on the use and accumulation of “capital”? Put another way, can the government make the country it rules more wealthy by restricting foreign imports? Smith’s First Law says no, for wealth is a function of capital: “No regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain. It can only divert a part of it into a direction into which it might not otherwise have gone …” (ibid.). [See also the paragraphs 13 & 14 of Book IV, Chapter 2 of The Wealth of Nations.]

What the Scottish philosopher-economist is saying here is that the government cannot increase a country’s wealth by restricting trade. Why not? Because the government cannot make its people more wealthy above and beyond the amount of capital they already have. To appreciate the timeless logic of Smith’s First Law, consider the following analogy: the wealth of a country is like the level of water in a reservoir, while protectionist trade policies are like a levee or dike. At most, according to Smith, government regulation of commerce can control the flow of water, but it cannot increase the overall level of water in the reservoir.

But Smith saves the best for last! He concludes the third paragraph of Book IV, Chapter 2 of his magnum opus by making the following offhand observation: “… and it is by no means certain that this artificial direction [i.e. regulation of commerce by the government] is likely to be more advantageous to the society than that into which it would have gone of its own accord” (ibid.). Stay tuned! I will continue my survey of Smith’s scathing and still-relevant critique of trade barriers in my next post …

Among other things, Adam Smith devotes an entire chapter of The Wealth of Nations to “Restraints upon the Importation from Foreign Countries.” (See Book IV, Chapter 2 of his magnum opus.) To begin with, the Scottish philosopher-economist concedes right off the bat that “high duties” (i.e. import tariffs) or “absolute prohibitions” (total embargoes) on imports can work to the benefit of local producers: “By restraining, either by high duties or by absolute prohibitions, the importation of such goods from foreign countries as can be produced at home, the monopoly of the home market is more or less secured to the domestic industry employed in producing them” (Wealth of Nations, IV.ii.1).

The father of economics then provides several specific examples of “high duties” or “absolute prohibitions” on foreign trade–specifically, those imposed on the importation of live cattle, salt, corn, wool, and silk:

“Thus the prohibition of importing either live cattle or salt provisions from foreign countries secures to the graziers of Great Britain the monopoly of the home market for butcher’s meat. The high duties upon the importation of corn, which in times of moderate plenty amount to a prohibition, give a like advantage to the growers of that commodity. The prohibition of the importation of foreign woollens is equally favourable to the woollen manufacturers. The silk manufacture, though altogether employed upon foreign materials, has lately obtained the same advantage. The linen manufacture has not yet obtained it, but is making great strides towards it. Many other sorts of manufacturers have, in the same manner, obtained in Great Britain, either altogether or very nearly, a monopoly against their countrymen.” (Ibid.)

Also, Smith notes that these restraints on foreign trade are not just limited to cattle and corn or wool and silk: “The variety of goods of which the importation into Great Britain is prohibited, either absolutely, or under certain circumstances, greatly exceeds what can easily be suspected by those who are not well acquainted with the laws of the customs” (ibid.). And next, Smith further reiterates that restrictions on imports benefit domestic graziers (cattle ranchers), domestic corn growers, as well as domestic woollen and silk manufacturers:

“That this monopoly of the home-market frequently gives great encouragement to that particular species of industry which enjoys it, and frequently turns towards that employment a greater share of both the labour and stock of the society than would otherwise have gone to it, cannot be doubted.” (ibid.Wealth of Nations, IV.ii.2)

It is here, however, where Smith’s analysis starts to get interesting, for he then makes the following offhand observation: “But whether it [i.e. protectionism] tends either to increase the general industry of the society, or to give it the most advantageous direction, is not, perhaps, altogether so evident” (ibid.). In other words, are restrictions on trade good on balance? Are they beneficial overall? Stay tuned, for I will survey Smith’s scathing and still-relevant critique of trade barriers in my next few posts …

Although the text of Article I, Section 8, Clause 1 of the U.S. Constitution specifically empowers the Congress (not the president) to set import tariffs (“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises …”), it turns out the legislative branch began delegating this power to the president during FDR’s quasi-dictatorship in the 1930s and 40s. (See here, for example, for an introduction to U.S. tariff policy.) As a result, the constitutional question we should be asking instead is this: Does the Congress have the authority to delegate any of its “Article I” powers to another branch of government in the first place? Perhaps it is time for courts to revisit the non-delegation doctrine, though good luck with that, since it turns out that Congress has also delegated most of its lawmaking powers to a plethora of regulatory agencies! (Bonus links: Ilya Somin, Adrian Vermeule, and William Funk.)

I will address some legal aspects of Trump’s executive order imposing tariffs on imports from our main trading partners (Mexico, Canada, and China) in my next post; in the meantime, today’s “Monday map” post is dedicated to my hometown: Los Angeles, California. Bonus link: Photographer Nicholas White surveys some of the most popular graffiti styles found on the streets of L.A. in this photo-essay.

Pictured below (from left to right) is principal Dr Rodriguez, yours truly, my youngest daughter Adys Ann, and my wife Sydjia. Our daughter won her school’s spelling bee two years in a row! School motto: “Work Hard. Play Hard. Pray Hard.”

See also this tweet by @wwwojtekk.

The worst offenders were FDR (pictured above), who signed over 3,700 Executive Orders or EOs (see link below), including the infamous Japanese internment order; Woodrow Wilson (1,803 EOs); and Calvin Coolidge (1,203 EOs). By way of comparison, Donald Trump has signed 40 EOs thus far into his second term (see here).

My colleague and friend Brian Frye has just posted @IpseDixitPod #807, which features Sarah Fackrell (Chicago-Kent) discussing her new law review article “The Counterfeit Sham“. Among other things, Professor Fackrell explains why design patent infringement is different from counterfeiting.