As I listen to the many discussions among politicians about the economy and about how their policies might be able to put us back on the track to prosperity, I always wonder how much they could learn from real economists like Carl Menger or Adam Smith. And especially Adam Smith needs a little reminder today since politicians from all parties are once again trying to destroy the core of our economic success by imposing more tariffs, quotas and regulations on our industry, and by reinstating trade barriers and import taxes — exactly the recipe for disaster as proven by Adam Smith in “The Wealth of Nations”. For 300 years, Europe was dominated by an economic system known as mercantilism. It provided modest improvements in life compared to the feudalism prior to that, alright, but it was nevertheless a corroded system rooted in error that stifled the entrepreneurial spirit and treated individuals as pawns of the State. Mercantilists were just economic nationalists. They thought foreign goods were sufficiently harmful that government should promote exports and restrict imports. Exports were to be paid for in gold and silver, not products. “To the mercantilist, the precious metals were the very definition of wealth, especially to the extent that they piled up in the coffers of the monarch,” as explained by Larry Reed, the President of FEE, in one of his lectures. “And because they had little sympathy for self-interest, the profit motive, and the operation of prices, mercantilists wanted governments to bestow monopoly privileges on a favoured few.”

Economics in the late 18th century was not yet a focused subject of its own, but rather a poorly organized compartment of what was known as “moral philosophy.” Adam Smith’s first book, “The Theory of Moral Sentiments,” was published in 1759, when he tutored at Glasgow University. He was the first moral philosopher to recognize that the business of enterprise merited being a full-scale discipline of thought among other social and behavioural sciences. In 1776, while American colonists proclaimed themselves independent from Britain and were engaged in a war with their former motherland, Smith delivered his literary and ideologically masterpiece, “An Inquiry into the Nature and Causes of the Wealth of Nations” — better known ever since as simply “The Wealth of Nations”. Smith wanted to investigate into the link between mercantilism and prosperity and came to the conclusion liberals and libertarians still hold dear today. Markets supersede governments in providing us with goods and services, and mercantilism is counter-productive. The aggregated initiatives of free individuals without burdens imposed on them by the State were the most durable way for a nation to prosper — not only individuals, but the society as a whole.

Contrary to mercantilists, Smith did not believe that the “pie” of the economy was fixed and that a bigger pie could be baked by lesser government intervention, by the promotion of investments in capital, and by implementing the principles of “division of labour”. Furthermore, Adam Smith was a consummate free trader who was just as eager to trade across political boundaries than within his own fief. He opposed any form of hampering trade by tariffs, quotas or prohibitions, and he exploded the “balance of trade” fallacy of mercantilism claiming that more goods should be exported than imported. According to Adam Smith, self-interest was the indispensable spur to economic progress, regardless of nationalist feelings. “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner,” he wrote, “but from their regard to their own interest.” In a free economy, he reasoned, no one can put a crown on his head and command that others provide him with goods. Or as Eamonn Butler, the founder of the Adam Smith Institute, stated in a recent article: “To satisfy his own desires, he must produce what others want at a price they can afford. Prices send signals to producers so that they will know what to make more of and less of. It wasn’t necessary for the king to assign tasks and bestow monopolies.” Prices and profit would act as an “invisible hand” with far more efficiency than any monarch or parliament. And competition would improve quality and reduce prices, so every single member of the society can benefit from it.

The ideas of Adam Smith exerted enormous influence on politicians before he died in 1790 and especially in the 19th century. America’s founders were greatly affected by his insights. So were Europeans. Ideas really do matter. Our politicians should take time to get acquainted with this Adam Smith again.

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