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Book 4, Chapter 7
Themes
Key
LitCharts assigns a color and icon to each theme in The Wealth of Nations, which you can use to track the themes throughout the work.
Labor, Markets, and Growth
Capital Accumulation and Investment
Institutions and Good Governance
Mercantilism and Free Trade
Money and Banking
Summary
Analysis
The mercantile system’s stated goal is to improve the balance of trade by increasing exports and reducing imports. But to a significant extent, Britain’s attempts to help domestic business produce goods cheaply actually do the opposite. It discourages the exportation of materials of manufacture and instruments of trade, while encouraging the importation of the materials but not the instruments (since the production of machines is itself an important domestic industry). For instance, textile manufacturers have pressured Britain into suspending duties on foreign wool and yarn, while offering bounties for exporting cloth. Britain also offers bounties for importing naval goods, indigo, wood, silk, and barrels from America (as well as hemp from both America and Ireland).
Smith has spent the first seven chapters of Book IV laying out why mercantilists misunderstand the economy, and then explaining the harms caused by each of the six specific policies that follow from that misunderstanding. Now, he synthesizes this analysis into a clear explanation of how mercantilism hurts Britain. Beyond its failure to enrich the economy, mercantilism actually undermines its own stated goal of improving the balance of trade. Of course, economists have long argued about whether these policies also had longer-term positive effects by enabling the Industrial Revolution to take hold in Britain first.
Themes
Meanwhile, exporting sheep and wool from Britain has long been illegal. For centuries it was strictly punished, including by death, and there are still “oppressive restrictions” on when, how, and where wool must be transported to avoid smuggling. People who live near the sea face extra restrictions on buying wool, which reduces the wool trade between domestic ports. Wool merchants justify this monopoly by falsely claiming that England produces the highest-quality wool. Together, these restrictions have kept wool prices low. In an ordinary business, this would cause people to leave and supply to fall. But since shepherds sell meat, hides, and wool, the restrictions’ effect is limited. Still, the government should impose duties on wool exports instead of banning them altogether. That way, it would collect revenue; now, it just encourages smuggling.
The combination of duty-free imports for foreign wool and yarn with the complete export ban for British sheep and wool ends up artificially lowering the price of British wool. This hurts shepherds but enriches textile producers. But the restrictions on the domestic wool trade partially counteract this effect, raising wool prices to enrich wool merchants. As the penalties for exportation become steeper, the incentive to smuggle wool out of Britain grows stronger—and the market becomes even more distorted. Since wool is only one of the three commodities that shepherds produce, they can still survive in this distorted market. But the wool restrictions will affect the markets for meat and hides, which have to become more expensive in order for shepherds to make a living.
Themes
Clay, rawhide and leather, cattle horns, yarn, white cloth, dye, watch and clock parts, some metals, and many other goods used for manufacture also face serious export restrictions, which are intended to support domestic manufacturing. For the same purpose, there are very low import duties and very high export duties on chemicals for dyes (like gum arabic), beaver pelts, and coal. It’s illegal to export instruments of trade—like any of the machines used in making wool or cloth—or even to go abroad and teach spinning or clothmaking techniques. Like the restrictions on apprenticeships, these rules protect British producers and hurt foreign ones, while raising prices for consumers.
Just like the wool laws, all of these other trade laws are designed to offer textile manufacturers the cheapest possible materials of manufacture by keeping British materials in the domestic economy, while inviting foreign ones in duty-free. Meanwhile, the restrictions on instruments of trade serve to ensure that no other country can industrialize as fast as Britain. Of course, if this knowledge and these machines were exported, then the global market for manufactured goods would become more efficient, and such goods would be even cheaper in Britain. But British manufacturers’ profits would fall, and the laws are quite obviously designed for their benefit.
Themes
The mercantile system’s central flaw is that it focuses on reshaping production, when consumption is really “the ultimate end and object of all industry and commerce.” All of Britain’s mercantilist policies, from blocking imports of competitive goods and putting bounties on exportation to the treaty with Portugal and the exclusive trade policies with the colonies, really just support merchants and manufacturers at consumers’ expense.
While mercantilism focuses on protecting producers’ monopolies (and inflated profit margins), Smith’s system focuses on providing the best possible goods to consumers at the lowest possible prices. No serious economists have taken mercantilism seriously for several centuries, but the debate between supply-side and demand-side economic policies continues raging to this day.
Themes
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