Land Of The Free Trade

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It is not a coincidence that Adam Smith’s The Wealth of Nations and what would one day be the world’s wealthiest nation should both have burst upon the global scene in 1776.

Before Smith, the prevailing economic doctrine was mercantilism. This theory had at its core the notion that only one party benefited from an economic transaction. Economics, it held, was therefore a zero-sum game. If that was true, then it stood to reason that detailed regulations were needed to see to it that a country was on the winning side as often as possible when its merchants traded with foreigners.

The measure by which the success of these regulations was judged was the amount of gold and other precious metals that flowed into a country. Thus, in general, exports were encouraged and imports discouraged and often forbidden outright. This, of course, perfectly suited vested interests at home that didn’t want foreign competition anyway, and Smith put his finger precisely on the engine that actually powered so much of mercantilist regulation: personal self-interest. “People of the same trade,” wrote Smith, “seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy asainst the public.”

To put it another way, the greatest enemies of the capitalist system as a whole are individual capitalists. The reason, of course, is that people invariably pursue their own economic interests—which they can usually see clearly—rather than the good of the whole, always a much murkier matter. But capitalists do not just conspire among themselves to rig markets and fix prices. They also seek to influence government to protect them from competition. In Smith’s day theirs were often the only voices heard trying to influence economic policy, for’an independent press had not yet evolved. And even today no one lobbies only for the common good.

Thus mercantilism, in Smith’s view, was really just a splendid refuge for scoundrels. In The Wealth of Nations he quite simply annihilates the intellectual basis of it. In page after page of elegant, Augustan prose, he demonstrates that in a free market both sides benefit from a transaction or it won’t take place. Thus wealth is created on both sides, not just transferred from one to the other, and it is the volume of trade that measures a country’s economic strength, not the amount of gold in the treasury or even the balance of that trade.

Newly minted, the United States did not have many entrenched interests to protect the mercantilist legacy. Indeed, onerous and unfair British mercantilist regulations, along with a total lack of American political power in London to do something about them, had been a prime cause of the Revolution. When the Founding Fathers, most of whom had read Smith’s book or knew its reasoning intimately, created the Constitution a few years later, they were able to incorporate into it a thoroughly Smithian view of the economic universe.

The Founding Fathers were able to incorporate into the Constitution a thoroughly Smithian view of the economic universe.

Because they knew that individual state governments would respond to the interests of their own citizens rather than the general good of the Union, the Founders assigned the regulation of interstate commerce exclusively to the federal government, where countervailing state interests would tend to offset one another. Interstate tariffs on American exports were specifically banned by the Constitution.

As a result, the United States began its independent existence with the freest internal market in the world, and it has largely maintained that freedom, at least relative to other countries. Having the greatest freedom to create wealth, American citizens have proceeded to do exactly that in vast abundance.

But the history of America’s external market—its foreign trade, in other words—has been a more complicated story. First, in no other country has the importance of foreign trade varied so much over history as in the United States. In the early days foreign trade was essential to the very survival of the tiny colonies clinging precariously to the edge of a wilderness continent. So outward-oriented was the economy, in fact, that by the end of the colonial period, the American merchant marine was second only to Great Britain’s in size, and foreign trade accounted for 20 percent of the colonial gross national product. After the Revolution, however, building the vast internal market more and more absorbed the economic energies of the country. By the early twentieth century the American merchant marine had nearly ceased to exist, and foreign trade, while very large as a percentage of total world trade, was only about 6 percent of the American economy. We were for nearly all intents and purposes, self-sufficient. Foreign trade, while certainly profitable, was no more than the icing on the cake of the American economy.