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In Chapter II of Book IV of The Wealth of Nations, Adam Smith makes the following assertion:

To prohibit, by a perpetual law, the importation of foreign corn and cattle, is in reality to enact, that the population and industry of the country shall, at no time, exceed what the rude produce of its own soil can maintain.

I'm not sure I follow. Is the argument that banning free trade leads to a check on the extent to which people can fulfil their needs and desires, due to the smaller wealth that the home country can bring about, as compared to the wealth that would be generated by all countries trading together?

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Smith just states that in autarky country can only enjoy as much goods and services as it itself can produce, which does not hold for trading nations (which can enjoy more goods and services trading together that each country can individually produce).

I guess to understand the passage one should understand the concept of absolute advantage (which Smith introduced in the Wealth of Nations).

For example, suppose that we have only 2 goods, wine and cloth, suppose wine takes 2 units of labor to produce cloth takes 1 unit of labor to produce and that England has 100 units of labor.

If we impose autarky, England cannot produce more than:

$$2w +1c \leq 100$$

In autarky, the constraint above will be biding, and this is what Smith means by that sentence. So if England would divide its labor equally on produce wine and cloth it could only produce and thus consume 25 units of wine and 50 units of cloth.

However, if England would abolish autarky, and there would be second country, let's say Portugal, that can produce wine at cost of one unit of labor, and cloth at cost of 2 units of labor, with endowment of 100 units of labor like England:

$$1w^* +2c^* \leq 100$$

By England specializing fully in cloth, and Portugal specializing fully in wine, and with terms of trade 1 unit of English cloth for 1 unit of Portuguese wine, both countries can consume 50 units of wine and 50 units of cloth, which is literally more than they can produce under autarky. This is the context in which the above statement should be read.

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  • $\begingroup$ Phenomenal explanation, thanks. Where does Smith introduce the concept of "absolute advantage"? I'm currently at the beginning of Book IV and I haven't encountered it yet. $\endgroup$ Jul 12 at 9:11
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    $\begingroup$ It is already quite some time I read WoN so I cannot point you to a specific page but he should discuss these ideas in the book IV.i. I do not remember if he actually calls it theory of absolute advantage, or that was term coined afterwards, but his model of trade, and argument for free trade is essentially built on the idea of absolute advantage, but as was common in the 18 century the research was very narrative based so the idea is spread over multiple sections and possibly even chapters and you have to synthesize it from the text. $\endgroup$
    – 1muflon1
    Jul 12 at 16:05

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