On Adam Smith's critique of Mercantilism, Natural Liberty, and Open Access Orders
Now that awareness of the salience of mercantilism has been restored it is worth looking at one of the subsidiary arguments that helped undermine it. As I noted a half year ago (recall), on the recommendation of my co-author, John Thrasher (Chapman), I read Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History (Cambridge, 2009) by Douglass C. North, John Joseph Wallis, and Barry R. Weingast (hereafter: NWW) last year.
One of the key moves in that book is to note the significance of open access societies; in recent times these are economically and militarily quite dominant globally. The book successfully manages to convey the idea that these are rare social achievements that are by no means inevitable or permanent. (That strikes me as rather prescient.) A key step in the transition from a mature natural state to an open access state is the development of a “procedure by which joint-stock companies could be formed by administrative procedure without the consent of the government.” (p. 218) Young Gladstone was instrumental to this change. As I noted at the time (here) this seems indebted to Adam Smith’s critique of mercantilism in Book IV of Wealth of Nations.
However, in my post I focused on Smith’s interest in such administrative procedures and registries because I took it as more controversial that Smith’s argument defends the role of the machinery of government in what I call witnessing truth. But I said nothing about Smith’s views on the corporate form since it is well known he is a critic of monopoly. Today, I rectify that imbalance.
Smith recognized that a shock therapy approach to opening up markets could cause enormous social dislocations and job losses. This was politically dangerous and inhumane. Smith was well aware that Turgot’s efforts to quickly liberalize the French economy floundered on ill-timed famine. In general Smith advocates gradualism in such circumstances. (This is what I emphasized in my big Adam Smith book.) The passage I am about to quote is part of a very long paragraph. In the paragraph Smith compares the supply shock to the economy when after the end of hostilities the army and navy are drawn down to the possible effects of the sudden introduction of free trade and the possible job losses that may result initially. (He also compares work habits of sailors and ordinary workers. I have skipped that.)
[T]hough a great number of people should, by thus restoring the freedom of trade, be thrown all at once out of their ordinary employment and common method of subsistence, it would by no means follow that they would thereby be deprived either of employment or subsistence. By the reduction of the army and navy at the end of the late war more than a hundred thousand soldiers and seamen, a number equal to what is employed in the greatest manufactures, were all at once thrown out of their ordinary employment; but, though they no doubt suffered some inconveniency, they were not thereby deprived of all employment and subsistence. The greater part of the seamen, it is probable, gradually betook themselves to the merchant-service as they could find occasion, and in the mean time both they and the soldiers were absorbed in the great mass of the people, and employed in a great variety of occupations. Not only no great convulsion, but no sensible disorder arose from so great a change in the situation of more than a hundred thousand men, all accustomed to the use of arms, and many of them to rapine and plunder. The number of vagrants was scarce anywhere sensibly increased by it, even the wages of labour were not reduced by it in any occupation, so far as I have been able to learn, except in that of seamen in the merchant-service….To the greater part of manufactures besides, it has already been observed, there are other collateral manufactures of so similar a nature, that a workman can easily transfer his industry from one of them to another. The greater part of such workmen too are occasionally employed in country labour. The stock which employed them in a particular manufacture before, will still remain in the country to employ an equal number of people in some other way. The capital of the country remaining the same, the demand for labour will likewise be the same, or very nearly the same, though it may be exerted in different places and for different occupations. Soldiers and seamen, indeed, when discharged from the king's service, are at liberty to exercise any trade, within any town or place of Great Britain or Ireland. Let the same natural liberty of exercising what species of industry they please be restored to all his majesty's subjects, in the same manner as to soldiers and seamen; that is, break down the exclusive privileges of corporations, and repeal the statute of apprenticeship, both which are real encroachments upon natural liberty, and add to these the repeal of the law of settlements, so that a poor workman, when thrown out of employment either in one trade or in one place, may seek for it in another trade or in another place, without the fear either of a prosecution or of a removal, and neither the publick nor the individuals will suffer much more from the occasional disbanding some particular classes of manufacturers, than from that of soldiers. Our manufacturers have no doubt great merit with their country, but they cannot have more than those who defend it with their blood, nor deserve to be treated with more delicacy. (WN 4.2.42; pp. 469-471 in Glasgow edition). [emphasis added.]
So, this passage is often quoted because it is part of Smith’s defense of free trade and Smith attacks (what he calls) the law of settlements. (The Poor Relief Act of 1662.) The latter represents Smith’s advocacy for far greater labor mobility so that people can pursue their lives as they see fit. The abolition of the law of settlements would also prevent landlords from nudging people out of their parish and prevent them from returning so that they could keep their expenses down during an economic crisis (or dislocation). It was eventually dramatically reformed in 1834 when the poor laws were changed due to the political success of Smith’s heirs in the Corn League.
But in the quoted passage Smith is also, in passing, calling for major reform of the nature of the corporation. He calls for the abolition of exclusive privileges of corporations. That is, he is attacking their ability to be granted monopolies. This is in fact, a major theme of Books IV and V, where Smith repeatedly notes that free competition is superior to monopoly in all kinds of ways. This, too, is well known.
But until I read Violence and Social Orders I had never reflected on the fact that the absence of an exclusive privilege for corporations had to involve relatively easy market entry of corporations in the registry of licensed or permitted business. In fact, in the very same passage Smith is also explicitly foreseeing a great many more manufacturers because he contemplates a world in which it is quite normal that a whole bunch of them go out of business at one time or another due to changing economic circumstances (“occasional disbanding some particular classes of manufacturers”). This was not common in an age of monopoly with only few manufacturers per industry or bit of territory.
So, Smith’s call for the repeal of exclusive privileges to corporations entails the call for one of the key building blocks of an open access order that will be much more dynamic in character. Since the whole argument against the mercantile system centers on how a few well-connected aristocrats are given exclusive privileges to trade for their own benefit, Smith is also hinting at the possibility that different kinds of people will be running corporations in the future.
That’s all I wanted to digress on today. But lurking here is one more important theme.* The quoted passage is one of the few passages where Smith actually tells us what he might mean concretely with a system of natural liberty. (In the next paragraph he tells us that its restoration can be compared to Utopia or Oceania.) And so it is no surprise, then, that I think what he means is what NWW have called an open access order.
This is not wholly ad hoc on my part. As regular readers know, I often call attention to an another passage, WN 4.9.3 (p. 663-664 in the Liberty fund edition), where there is a long set piece in which Colbert is treated as the spiritual father of the mercantile system (or at least exhibiting its prejudices). At the end of that passage Smith writes, “The industry and commerce of a great country he endeavoured to regulate upon the same model as the departments of a publick office; and instead of allowing every man to pursue his own interest his own way, upon the liberal plan of equality, liberty and justice, he bestowed upon certain branches of industry extraordinary privileges, while he laid others under as extraordinary restraints.” (emphasis added).
The two passages are connected by the damage done by extraordinary privileges of corporations to individual freedom. And in both cases the badness of the corporate structure is itself connected to the manner in which corporations are administratively regulated.
I am the first to grant that Smith probably under-specifies what the liberal plan really is. I tend to summarize it as moral equality, the freedom to pursue meaningful choices protected by law, and robust defense of property rights. But thanks to NWW, I recognize much better now that this involves serious reform to the way businesses can be set up.
That is to say, even for Adam Smith the attack against mercantilism is not just about free trade and low prices. The attack on mercantilism is an attempt to defeat the way rich, connected people can rig the bureaucratic structures to serve their own ends at the expense of the rest of society.
As the open access order is undermined, it is to be expected that, as the widespread practice of discriminating tariffs are re-normalized (and all the temptations to bribe the executive re-opened), and the attempt to defeat smuggling helps expand the police/terror state, the temptation to provide cronies with monopolistic privileges to help combat shortages will reappear.
*What follows is prompted by continued reflection on recent reading of an unpublished paper by Chandran Kukathas.