Thread by @adamsmithworks

Here we are in Book 4, chapter 2. It's clear that by restraining and prohibiting imports, you can give a monopoly to domestic manufacturers. But can you create wealth?

Well, we know how #AdamSmith feels about monopolies. (IV.ii.1) #WealthOfTweets #SmithTweets

In fact, Smith's not even all that convinced that prohibitions keep foreign goods out. (IV.ii.1) #WealthOfTweets #SmithTweets

Dear readers, we do not tweet the footnotes. (If that's your sort of thing, totally @ us.) But we have to draw your attention to the footnoted letter to William Eden where Smith claims that he burnt a bunch of his clothes for being illegal. (IV.ii.1) #WealthOfTweets #SmithTweets

Anyway. Regardless of all that, a legal monopoly definitely supports the industry it's granted to. But does it create wealth? (IV.ii.2) #WealthOfTweets #SmithTweets

There's only so much capital available. Trade policy can't change that; it can only (try to) regulate away competition. That can only redirect capital, not create more. (IV.ii.3) #WealthOfTweets #SmithTweets

Individuals, left to their own devices, are pretty good at getting the most out of their capital. And, in 1776, they were bound to favor trade closest to home—it was (still is?) less risky, less complicated, and gives speedier profits! (IV.ii.4–8) #WealthOfTweets #SmithTweets

That makes it sound like you'd never get anyone in the foreign trade. But higher profits can convince people to take risks, put up with complications, and be more patient. (IV.ii.4–8) #WealthOfTweets #SmithTweets

Profits tell us where to employ our capital. We're not opposed to helping society, but it's not what we're trying to do. Self-interest leads us, by an #InvisibleHand, to promote the interests of others and of society as a whole. (IV.ii.9) #WealthOfTweets #SmithTweets

Most famous passage in Smith? You bet!

Smith never tells us what, exactly, the #InvisibleHand is. It’s the thing that, when we follow our own interests, means we also help others.
We don’t need to know what it is to know what it does. (IV.ii.9) #WealthOfTweets #SmithTweets

People making decisions on the ground do better than politicians who might direct them. Besides, that power "would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it." (IV.ii.10) #WealthOfTweets #SmithTweets

Using political power to give a monopoly over the home market is either useless (if it doesn't improve wealth creation—can't increase capital, remember?) or hurtful (if it means capital is used more poorly). (IV.ii.11) #WealthOfTweets #SmithTweets

A nation can’t go wrong treating its political economy like a family budget. Oikos, remember? (IV.ii.11–12) #WealthOfTweets #SmithTweet

"Regulation can help encourage a new industry to develop. But should it try? 🤔

You could make wine in Scotland. But why? French wine is cheaper (and probably better). We're willing to taste test, though. (IV.ii.13–15) #WealthOfTweets #SmithTweets "

As long as we can trade, it doesn’t matter if different countries are better at things that we are. In fact, it’s good news! (IV.ii.15) #WealthOfTweets #SmithTweets

Cui bono? Merchants and manufacturers, if you're asking about monopoly over the home market. Corn and cows are hard to ship. That makes country gentlemen and farmers less vulnerable to the “wretched spirit of monopoly.” (IV.ii.16–21) #WealthOfTweets #SmithTweets

It’s also harder for country gentlemen and farmers to meet up and scheme against consumers than it is for town merchants. (IV.ii.21) #WealthOfTweets #SmithTweets

Always hapless (according to Smith), country gentlemen DO get taken in by scheming merchants. They demand restrictions on the trade of cows and corn because they don't understand that it doesn't really help them. (IV.ii.21)
#WealthOfTweets #SmithTweets

Forbidding foreign corn and meat does nothing but cap the population size to what the nation’s production can support.

That's bad. (IV.ii.21–22) #WealthOfTweets #SmithTweets

(Because to create wealth you need labor and invention and division of labor and an extensive market. You need people!) #WealthOfTweets #SmithTweets

Smith does consider two reasonable limitations on foreign industry.

1) The shipping industry because it’s closely tied to military defense, and
2) domestic products that are taxed should be equally taxed when imported.

(IV.ii.23–36) #WealthOfTweets #SmithTweets

Getting the tax on foreign goods right is easier said than done. It hardly helps a country's people to respond to one thing being more expensive by making everything else dearer, too. (IV.ii.32–35) #WealthOfTweets #SmithTweets

Taxes can be as bad for the wealth of a country as bad soil and bad weather. (IV.ii.35–36) #WealthOfTweets #SmithTweets

Because bad tax policy can be so destructive, only expensive countries tend to have them. No one else can afford it. (IV.ii.36) #WealthOfTweets #SmithTweets

[Don't worry, tax nerds. We'll talk more about 'em in Book V!] #WealthOfTweets #SmithTweets

Smith also considers two cases of trade restriction that he at least won't automatically condemn:

1) Retaliatory trade restrictions
2) Phasing in free trade

(IV.ii.37) #WealthOfTweets #SmithTweets

Smith admits that there's a case for trade restrictions against a country that blocks your goods, 𝗜𝗙 that your restriction convinces them to get rid of theirs. Regaining access to the market can repays the cost of trade restriction. (IV.ii.39) #WealthOfTweets #SmithTweets

Figuring out if you can deliver on that 𝗜𝗙 is something best left to “that insidious and crafty animal”, the politician. It's not something that can be decided on the general principles that govern statesmen. (IV.ii.39) #WealthOfTweets #SmithTweets

If the politician gets it wrong, it’s just another tax. A domestic tax on the whole country in response to a foreign tax on a certain class of people. (IV.ii.39) #WealthOfTweets #SmithTweets

Smith is also willing to grant a little leeway for phasing out slowly existing trade restrictions. People need time to find new jobs and investments in other industries. But the protectionist policies have got to go! (IV.ii.40–42) #WealthOfTweets #SmithTweets

Smith knows that people are going to say there's nowhere for those workers (and investors) to go, but he doesn't buy it. It’s not going to be worse than soldiers looking for work after a war, and there's precedent for that. (IV.ii.42) #WealthOfTweets #SmithTweets

In fact, let's learn from soldiers after the war and eliminate other privileges, too. Not just protectionism. All workers should have the "natural liberty to exercise what species of industry they please" to smooth the transition. (IV.ii.42) #WealthOfTweets #SmithTweets

Alas, expecting entirely free trade is ridiculous and Utopian. Both public prejudices and private interests oppose it. Politicians are rewarded for imposing restrictions and granting privileges and monopolies against the public. (IV.ii.43) #WealthOfTweets #SmithTweets

But remember: regulation leads to disorder, and disorder prompts calls for more regulation. It’s utopian to think we can avoid the trap of protectionism, but it’s still a trap.(IV.ii.44) #WealthOfTweets #SmithTweets

More on how we fall into those traps tomorrow. See you then! #WealthOfTweets #SmithTweets