Arrogant would be too nice a descriptor of any attempt to fancy that I can AA reveal any new truth about Adam Smith's volume An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Oceans of ink have been consumed writing about this book. For me to attempt to mine from it even a tiny nugget of heretofore overlooked insight would be laughably futile.
Fortunately, my assignment isn't to pretend to discover some never-before-noticed truth buried in Smith's masterpiece. Instead, it's to explain Smith's relevance today. But what exactly is meant by "relevance" when we speak of a book? One possibility is its "actual effect on events." Yet there's a second and very different possible meaning, which is its status as a uniquely rich source of desperately needed wise guidance.
In an ideal world, actual events are affected only by the wisest of guides, and all wisdom affects reality. Our world, sadly, isn't ideal. Although The Wealth of Nations overflows with wisdom, its counsel has too seldom been heeded--and so some might justifiably say that this book has too seldom been relevant and that today it is virtually irrelevant.
But if a book's relevance is measured not by its actual effect so far but instead by its potential to have profoundly favorable effect going forward, then few books are as relevant today as Wealth of Nations.
Indeed, having read this magnificent book annually for the past eight years, (1) I confidently yet with distress conclude that the relevance of Wealth of Nations in the second sense has seldom been as great as it is today. This distressing relevance, of course, springs from the recent resurgence of fear of economic openness and dynamism and, in particular, of hostility to free trade.
The Core of Wealth of Nations
Economists today think of Wealth of Nations as launching the discipline of economics. But the core of Wealth of Nations is book IV, which is a thorough, vigorous, and brilliant criticism of both the strict economics and the political economy of what Smith called "the mercantile system"--or what we today call "mercantilism." Evidence that Smith regarded book IV as the core of his treatise is supplied by his famous description--in a letter to Andreas Holt in October 1780--of Wealth of Nations as "a very violent attack I had made upon the whole commercial system of Great Britain" (in Smith 1987, 251). That attack is what book IV is all about. (2)
To read now this core of Wealth of Nations is to read chapters that easily might have been written this morning. If Smith were resurrected front his grave in Edinburgh's Canongate Kirkyard and given a few hours to become familiar with current commentary on trade by politicians and pundits, he would be surprised by nothing. Today's arguments for tariffs are identical to those made in Smith's lifetime, and so Smith's analysis of trade interventions remains relevant.
Smith opened book IV with an extended criticism of the mercantilist obsession with money, an obsession rooted in the notion that money is wealth and that wealth is only money. Smith slayed no straw man. Jacob Viner confirmed the fact that mercantilists identify wealth as exclusively money. After meticulously surveying centuries of mercantilist writings, Viner concluded that mercantilists can be understood only if "all goods other than money were worthless, or were of value only as they served as means of securing money" ( 1965, 17). (3)
Inquiring into the nature of the wealth of nations, Smith famously argued that mercantilists have matters backward. Contempt poured from Smith's pen when he wrote that "[i]t would be too ridiculous to go about seriously to prove, that wealth does not consist in money, or in gold and silver; but in what money purchases, and is valuable only for purchasing" ( 1981, 438). (4) Wealth is real goods and services that satisfy consumers. And the greater both the number of consumers satisfied and the intensity of that satisfaction, the wealthier the nation.
Once grasped, this understanding of the nature of wealth, as Smith noted, is too obvious for words. Money as such cannot be eaten, worn, or ridden upon. It offers no shelter, education, or entertainment. But because money can be readily exchanged for real goods and services, people routinely say that a rich person is someone "with a lot of money"--and thus to become rich is described as "getting a lot of money."
Mercantilists, blind to the fact that money is valued only because it ultimately is exchangeable for real goods and services, reason that a nation, just as an individual, is wealthier the more its possessions consist of money. As Smith described this mercantilist fallacy, "A rich country, in the same manner as a rich man, is supposed to be a country abounding in money; and to heap up gold and silver in any country is supposed to be the readiest way to enrich it" (429).
From this confusion of money with wealth springs mercantilists' (in)famous hostility to imports and fondness for exports. Both imports and exports are paid for with money, but the former sends money out of the country, whereas the latter brings money into the country. As seen through mercantilist lenses, therefore, importing drains the nation of wealth, whereas exporting fills it with wealth.
A related mercantilist fallacy is that trade policy should aim to cause the domestic country consistently to run "positive" trade balances--that is, to export more goods and services than it imports. Because a trade surplus means that the country is a net importer of money and a net exporter of real goods and services, in the mercantilist mind a trade surplus means that the country is a net importer of wealth and a net exporter of worthless matter. For mercantilists, therefore, a trade deficit is an unambiguous loss, for whenever the country runs such a deficit, its stock of worthless stuff--goods and services--increases, while its stock of wealth--money--decreases.
To a modern-day economist--indeed, to anyone of good sense--it's no surprise that Adam Smith, for this reason and for others, concluded that "[n]othing, however, can be more absurd than this whole doctrine of the balance of trade" (488).
The Ironic Mercantilist Fuel for Postwar Trade Liberalization
Who can observe the world of 2020 and not see the relevance of Smith's critical analysis of mercantilism? The president of the United States regularly insists that U.S. trade deficits are evidence that America is "losing" at trade--that other countries are draining us of our wealth. Announcements identical in content, if often less bombastic in tone, are daily fare in mainstream newspapers, magazines, blogs, Twitter feeds, talking-head television and radio programs, and stump speeches.
Although the embrace of mercantilism is...