Free trade: Why Adam Smith sided with consumers and not producers


The nineteenth century is often described as the “golden age” of free trade. It was the era during which the freedom to trade, unhindered by government, spread across the world, spearheaded by Britain. But the golden era didn’t just happen. The periods before it, particularly the 17th and 18th centuries, were marked by widespread protectionism, and then a tepid move towards freer trade conditioned upon reciprocity. However, in the mid-19th century, Britain abandoned reciprocity for unilateral free trade and unleashed a global phenomenon that allowed international commerce, the import and export of merchandise, to take place unrestricted. It was a victory of the liberty of individuals over state control.

But the above narrative is incomplete without mentioning the epic battles of ideas and clashes of interests that led to the paradigm shift. It is those battles, in which the free trade doctrine prevailed over mercantilism and the primacy of consumers’ interests over those of producers was recognised, that I want to talk about here. This is important because we must constantly restate the fact and remind ourselves, particularly in Nigeria where protectionist sentiments are very strong and dominant in business and government circles, that free trade is about improving the welfare of individuals and increasing real national income.

Of course, the mercantilists of old, like the protectionists of today, did not share that view. They believed that imports must be restricted. Their argument was that, by restricting import, a nation can achieve a favourable balance of trade, accumulate foreign exchange, protect domestic industries, maximise employment, promote national wealth and, ultimately, increase state power.Thus, Thomas Mun, the father of English mercantilism, wrote in his book, England’s Treasure by Foreign Trade (1664): “The ordinary means therefore to increase our wealth and treasure is by Foreign Trade, wherein we must ever observe this rule: to sell more to strangers yearly than we consume of theirs of value”.

The mercantilist ideas fed into economic policies in the 17th and 18th centuries and led to widespread protectionism. Germany built a tariff wall, with the Zollverein (customs union), which imposed high tariffs against foreign goods. Britain introduced a series of Navigation Acts that allowed only British ships to convey foreign goods to Britain, a measure effectively designed to restrict foreign trade. Then, from 1815, under pressure from landowners, who wanted to keep the prices of their grain at a high level, Britain introduced a series of statutes, known as Corn Laws, restricting the import of grain.

Of course, as the mercantilists had wanted, the Navigation Acts and Corn Laws protected Britain’s domestic producers and enabled them to expand their output and increase their revenues through high prices. But at whose or what expense? Well, at the expense of consumers, the expense of economic efficiency and the expense of national welfare!

These were the counter-arguments that Adam Smith made powerfully in his seminal work, The Wealth of Nation (1776), which set out the most intellectually coherent argument against protectionism and the most cogent case for free trade. It is difficult, if one follows Smith’s analysis with an open mind, to flaw his logic. Let’s try and simplify his argument.

Smith’s starting point was a recognition that the primary aim of every producer or, if you like, every businessman, is to pursue his own interest by using his resources to secure maximum financial benefits. Businesses are not charities, and, thus, not motivated by the desire to provide public goods. As Smith put it: “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own interest”. Yes, they are self-interested and want to make money, a lot of it even!

But, as the businessman or producer pursues his own interest, he ends up promoting the interest of the society too. How? Well, this is one of the most profound insights from Adam Smith’s analysis of the economic interactions of individuals. He said that an “invisible hand” would lead the businessman to promote an end – the public interest – which was not part of his intention. The logic is simple and flawless. Surely, if you want to produce something and make a lot of money from it (which serves your own interest), then you must produce something that society wants (which serves the public interest). A product can only survive in the real marketplace if the society wants it!

The idea of the invisible hand, therefore, is that the competitive market (not government) is the best mechanism for determining profitable lines of activities and allocating resources to those ends. Put simply, a business would not allocate resources to a commercial activity unless it’s profitable, but an activity won’t be profitable unless people want it. That market mechanism ensures efficient allocation of resources, which, in turn, ensures that the wants and desires of individuals are met, and that the annual revenue of society (real national income) is raised to its highest level. But where producers are not exposed to foreign competition but, rather, have a monopoly of the domestic market through protectionism, they can afford to be slothful, producing goods at poor quality and yet charge higher prices. In a monopoly or a protected market, the people are forced to buy poor quality products at artificially high prices, which reduces their welfare.

It was the detrimental effect on consumers and the national welfare that formed the core of Adam Smith’s criticism of mercantilism. As he put it, “consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer”, adding: “But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer”. So, while Adam Smith recognised the desire of the producer to secure the most advantage from employing his resources as legitimate, he concluded that such self-interest couldn’t be justified if pursued at the expense of the interest of the consumer for, to repeat his words, “consumption is the sole end and purpose of all production”!

By the early 19th century, Adam Smith’s ideas had begun to gain traction in Britain, thanks to a number of events that vindicated his views. The Corn Laws had negative impacts on the disposable income of the people and knock-on effects on manufacturing as most people couldn’t afford to buy manufactured goods, having spent the bulk of their income on grain. This led to the emergence of the Anti-Corn Law League, led by Richard Cobden. The Irish Potato famine, the Great Hunger, which broke out in 1845, also made restrictions on food imports unsustainable. Well, the Corn Laws were repealed in 1846, as were the Navigation Acts. Britain declared unilateral free trade.

Of course, protectionism and reciprocity later returned globally, but Britain remains instinctively a free trade nation. Indeed, it recently announced that after leaving the EU, it would unilaterally remove import tariffs on nearly 80% of products.

Sadly, Adam Smith’s ideas do not resonate in Nigeria. Production, and not consumption, is the ultimate end and object of industry and commerce in this country. Every policy is geared towards protecting the producer. Which is why, despite widespread poverty and hunger, Nigeria continues to ban food imports. The competitive market that allows efficient allocation of resources, that improves the welfare of the people and that increases real national income is patently absent. Nigeria must love Adam Smith, not Karl Marx!

Olu Fasan

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