The Wealth of Nations · Chapter
I: Of the Unreasonableness of Those Restraints Even Upon the Principles of the Commercial System explained
Smith argues that even within the logic of the commercial system, restraints on imports from countries with a supposed unfavorable balance of trade are unreasonable.
What happens
Smith argues that even within the logic of the commercial system, restraints on imports from countries with a supposed unfavorable balance of trade are unreasonable. He critiques the use of customhouse books and exchange rates as unreliable indicators of trade balance, and contends that free trade, even with a country like France, could be beneficial through cheaper goods and re-export opportunities. He attributes such restraints to national prejudice and private interest rather than sound economic principles.
Themes in this chapter
Free Trade and Market Competition
Smith argues against trade restraints, advocating for free trade even with rival nations like France.
Self-Interest and the Invisible Hand
The chapter highlights how private interest and national prejudice drive trade restrictions, contrary to public good.
Role of Government
Critique of government-imposed duties and prohibitions as unreasonable even within the commercial system's own principles.
Characters to notice
- Great Britain
Subject of trade restraints and exchange analysis with France and Holland.
- The Dutch
Engaged in carrying French goods to other European countries, benefiting from trade.
- Holland
Used as an intermediary in trade and bills of exchange between England and other countries.
Key passages
“To lay extraordinary restraints upon the importation of goods of almost all kinds, from those particular countries with which the balance of trade is supposed to be disadvantageous, is the second expedient by which the commercial system proposes to increase the quantity of gold and silver.”
The commercial system's second method to boost gold and silver reserves is to heavily restrict imports from countries with which it has a trade deficit.
Smith introduces the topic of the chapter: unreasonable trade restraints.
“Those mutual restraints have put an end to almost all fair commerce between the two nations, and smugglers are now the principal importers, either of British goods into France, or of French goods into Great Britain.”
The reciprocal trade barriers between Britain and France have destroyed legitimate trade, leaving smuggling as the main channel.
Smith criticizes the destructive effect of trade restrictions.
“The principles which I have been examining in the foregoing chapter took their origin from private interest and the spirit of monopoly; those which I am going to examine in this, from national prejudice and animosity.”
Earlier restraints came from private monopoly interests; the ones discussed here stem from national prejudice and hostility.
Smith distinguishes between two sources of trade restrictions.
“If the wines of France are better and cheaper than those of Portugal, or its linens than those of Germany, it would be more advantageous for Great Britain to purchase both the wine and the foreign linen which it had occasion for of France, than of Portugal and Germany.”
If French goods are superior or cheaper, Britain benefits by buying from France rather than from other countries.
Smith argues for free trade based on comparative advantage.
“National prejudice and animosity, prompted always by the private interest of particular traders, are the principles which generally direct our judgment upon all questions concerning it.”
Our views on trade balances are shaped by national bias and the self-interest of specific merchants.
Smith identifies the drivers behind misguided trade policies.
