Addressing Problems Rather than Perpetuating Them

mercantilism job creation

Jon Murphy for AdamSmithWorks

Questions about how to help workers without harming economic growth were as important in Adam Smith's time as in our own. 
Book IV of the Wealth of Nations contains the majority of Adam Smith’s discussion on mercantilism.  In Book IV, he examines mercantilism and exposes its internal contradictions.  Smith also examines the arguments for differing forms of protectionist tariffs and whether they are justified.

One argument that Smith strongly rejects is the argument that tariffs are needed to protect domestic workers from economic changes (all citations are the Liberty Fund edition, pages 469-471).  Smith writes that “though 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” (pg 469).  Smith cites the conclusion of a recent war where policymakers were concerned that the discharge of the Army and Navy would result in economic and social turmoil.  Smith shows the opposite happened: 
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.
(pg 470) 
However, Smith does note there is a major difference between soldiers and ordinary workmen.  Soldiers and sailors were exempted from many of the occupational rules that hindered other workers: “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” (pg 470).  Exclusive corporate privileges, apprenticeship rules, and the Poor Law, can all hinder the ability of a workman to alter their profession.  With these sorts of barriers in place, protectionists argue, tariffs are needed to discourage foreign industry from displacing domestic workers and causing disorder.

Smith disagrees, however.  Smith dismisses the idea of a protective tariff for workers.  As he discusses in Book IV and V, tariffs tend to make workers worse off by increasing the costs of their goods (especially when applied to necessities).  While a tariff may help them keep their jobs, ultimately, they are made worse off and the same problem remains.  Rather, Smith advocates addressing the actual problem:
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 of which are real encroachments upon natural liberty, and add to these the real of the law of settlements, so that a poor workman, when through out of employment either in one trade or in one place, may seek for it in another trade or in another place…and neither the publick nor the individuals will suffer much more from the occasional disbanding of some particular classes of manufacturers, than from that of soldiers.
(pgs 470-471)
What workers need, in other words, is more freedom, not less.  If the problem is that it is difficult for workers to adjust to changing conditions, then make it easier for them to adjust rather than infringing further upon their liberty and livelihood.  Smith experienced firsthand how flexibility in occupation can improve one’s prospects: he started his professional life as an English professor, and then a professor of moral philosophy and law.  He then doubled his income and traveled Europe as the personal tutor to Henry Scott, the Duke of Buccleuch (this trip served as the research foundation for much of his work in The Wealth of Nations).  After the publication of The Wealth of Nations, Smith took a government post as commissioner of customs in Scotland, securing him a pension until his death.  Each of these positions gave Smith the flexibility he needed to pursue his work, better himself, and avoid the “torpor of the mind” that develops when one does the same job over and over.  

Smith’s argument holds true today.  Many modern protectionists make the same argument: free trade displaces workers and it is difficult for them to find new work.  Further, manufacturing is much more skilled work now than in Smith’s time; as the division of labor has led to a deeper market, jobs have become very specialized.  Nevertheless, Smith’s wisdom holds true: attack the problem.  Here in the US, there are many barriers to changing jobs, occupational licensing being a significant one.  Occupational licensing rules often vary state-by-state and many states do not recognize licenses from others.  In turn, this prevents workers from being able to search out better jobs and opportunities in other states.  Even within states, obtaining a license can be a costly affair, often requiring hundreds of hours worth of work.  Removing those barriers will make it much easier for workers to adjust to economic disruptions (not just disruptions from trade).  Liberty, not tariffs, is what Smith would suggest for the American economy.

Combining this post with my earlier one on transitional gains traps, we start to see a Smithian roadmap for reform: well-telegraphed change toward more liberty.  Liberty, not tariffs, is the path forward for promoting opulence. 

Want more?

Jon Murphy's Avoid Traps with Adam Smith and Gordon Tullock and Teaching Smith in a Modern Law and Economics Course
Maryann Keating's Adam Smith on Wage Taxes and Labor Force Participation and Adam Smith on Differential Returns to Labor
Dear Adam Smith: First Job Interview