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April 17, 2022 Reading Time: 8 minutes
Reprinted from Law & Liberty

Oren Cass leads American Compass and has there published a long article that recounts the development of his thought. In his youth, Cass was a “convert to a fundamentalist sect,” namely “market fundamentalism.” Now he has matured and opposes something called “globalization,” which he describes as the antithesis of “capitalism.” Capitalism, we learn, “locks everyone in a room together and encourages them to find a way out.” 

Throughout the maturation process, Cass has felt that Adam Smith was by his side. He still invokes Smith. The invocation is ungrounded, however. Cass particularly misrepresents Smith on matters of foreign investment.

Cass’s views revolve around an idea of a “bounded market,” where “economic analysis and legal treatment of activity depends on whether it occurs within the boundary, across it, or beyond it.” Explaining the “bounded market”, he says: “Through restrictions on trade or capital flows, public policy can force imports and exports into balance, so that goods and services are exchanged for each other rather than for financial instruments.”

But a bounded market already exists, as Dominic Pino points out. Pino explains that Cass’s sloganeering simply spells yet more governmentalization of social affairs. In calling for this, Cass is at odds with Adam Smith. Yet Cass insists otherwise. He concedes that Smith and David Ricardo taught that free enterprise generally advances the good of the whole. But Cass has made a discovery: “Their theories applied, they both insisted, only so long as a nation’s capitalists invested within its own borders.” Cass’s invocation of Ricardo is nicely treated by Donald Boudreaux. The present essay focuses on Cass’s invocation of Smith.

The first chapter of Smith’s Wealth of Nations culminates in marvel and wonder: “How much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world!”

That is one of three consecutive sentences ending with an exclamation point. Here, Smith imagines the worldwide activities flowing into the woolen coat enjoyed by “the most common artificer or day-labourer.” Beyond that chapter, there are only three exclamation points in Wealth of Nations. Smith, then, begins his work with a unique sense of marvel at how his theories do apply across national boundaries. 

“[E]ach nation ought, not only to endeavour itself to excel, but from the love of mankind, to promote, instead of obstructing the excellence of its neighbours,” Smith wrote in The Theory of Moral Sentiments. His ethics are patterned after benevolent monotheism and a universalistic Imago Dei: “The all-wise Author of Nature,” he says, “has made man, if I may say so, the immediate judge of mankind; and has in this respect, as in many others, created him after his own image.” He calls the Chinese the “brethren” of Europeans. 

Cass wants to see public policy “force imports and exports into balance.” Smith wrote: “Nothing, however, can be more absurd than this whole doctrine of the balance of trade.” Boudreaux and I have explained a rival semantic wherein what is normally expressed as a “trade deficit” is a “current-stuff surplus.” Smith’s free-trade teaching rings out in Wealth of Nations (notably, 448, 538-539, 629, 637).

In economic affairs that cross national boundaries, people benefit one another not only by navigation and trade. They do so also by investment, as when an Englishman invests in enterprises in France, or a Frenchman invests in enterprises in England. In Cass’s mind, foreign investment is something baneful. His “bounded market” seems to say that the government should further restrict, if not prohibit, foreign investment. 

On the matter of foreign investment, Cass misrepresents Smith in two ways. First, he seems to suggest that Smith’s theorizing assumes that there is little to no foreign investment. Cass writes, “Smith and Ricardo…assumed that capital would remain in the domestic market. And as a corollary, both conceived of trade as occurring only on the basis of goods for goods.” In a reply to Pino, Cass writes: “Smith and Ricardo wrote about one very specific kind of trade — the direct exchange of goods for goods — and assumed this would occur in a world where capital remained within national boundaries.”

Second, Cass suggests that Smith’s favor for liberal policy depended on this same assumption of little to no foreign investment. Cass writes: “Smith and Ricardo never suggest that this pursuit of profit abroad will align with the public interest at home, no other theory gives a reason that it should, and empirically it has not.”

On both points, Cass is wrong about Smith. I do not mean to imply that Smith would not under any circumstances favor a restriction on foreign trade or investment. Smith considered arguments for making an exception to the principle of free trade, but, as Boudreaux explains, Smith himself tended to diminish those arguments.  We cannot rule out that Smith might favor certain restrictions under certain circumstances, for polity reasons, perhaps because they would support political stability or national security, or simply because they would play a part in the crafty art of liberal politics. Smith strove to make governments less dishonest and illiberal, but knew that foreign countries had governments too. Smith’s friend Edmund Burke exemplified the virtuous pursuit of circumstantial liberal politics.

Smith said that foreign investment tended not to be extensive, because, when an Englishman is deciding where to invest, a domestic enterprise holds natural advantages over a foreign enterprise. But the outcome is something that occurs naturally under liberal policy:

[E]very individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry; provided always that he can thereby obtain the ordinary, or not a great deal less than the ordinary profits of stock.

Thus, upon equal or nearly equal profits, every wholesale merchant naturally prefers the home-trade to the foreign trade of consumption, and the foreign trade of consumption to the carrying trade. In the home-trade his capital is never so long out of his sight as it frequently is in the foreign trade of consumption. He can know better the character and situation of the persons whom he trusts, and if he should happen to be deceived, he knows better the laws of the country from which he must seek redress. (emphasis added)

Smith is saying that natural advantages to staying close to home make up for a little less in expected “profits.” But that is not to say that those natural advantages will necessarily compensate for a lot less in expected profits. If the opportunity in France promises substantially more, maybe our Englishman invests there. It is unusual for an Englishman to know and seize such a French opportunity. But Smith does not rule out the possibility. Maybe our Englishman has family or friends in France, or business associates that he has come to trust.  

Next, consider Smith on “the carrying trade,” that is, shipping between countries other than the investor’s own country. He reckoned it as something other than domestic investment: “In the carrying trade, the capital of the merchant is, as it were, divided between two foreign countries, and no part of it is ever necessarily brought home, or placed under his own immediate view and command.” Wealthy men in a rich country often invest in the carrying trade:

When the capital stock of any country is increased to such a degree, that it cannot be all employed in supplying the consumption, and supporting the productive labour of that particular country, the surplus part of it naturally disgorges itself into the carrying trade, and is employed in performing the same offices to other countries. The carrying trade is the natural effect and symptom of great national wealth; but it does not seem to be the natural cause of it…Holland, in proportion to the extent of the land and the number of its inhabitants, by far the richest country in Europe, has, accordingly, the greatest share of the carrying trade of Europe.

Smith also recognizes foreign investment by the British in “the stores and warehouses from which goods are retailed in some provinces, particularly in Virginia and Maryland.” Smith regrets how British policy has blocked investment into the Colonies from countries other than Britain: “[B]y the expulsion of all foreign capitals [the monopoly on colonial trade] necessarily reduced the whole quantity of capital employed in that trade below what it naturally would have been in the case of free trade.”  

And Smith discussed the East India Company extensively. He thought it dependent on bailouts from the British state and abusive of Indians. He advocated that its exclusive monopoly lapse. It was the Company’s exclusive privilege and abuse that Smith opposed, not trade and investment. Smith called for “the trade to be laid open to all the subjects of the state [Britain].” 

Does Smith ever frown on foreign investment? Smith does say that British capital invested in Britain more surely augments employment in Britain than British capital invested abroad. But universal benevolence does not stop at the border: “The capitals of the British manufacturers who work up the flax and hemp annually imported from the coasts of the Baltic, are surely very useful to the countries which produce them.” Smith hardly seems opposed to British investment in the Baltic countries. Elsewhere Smith writes: “Though the same capital never will maintain the same quantity of productive labour in a distant as in a near employment, yet a distant employment may be as necessary for the welfare of the society as a near one; the goods which the distant employment deals in being necessary, perhaps, for carrying on many of the nearer employments.” 

Smith’s point about the advantages of investing close to home leads into the invisible-hand passage in Wealth of Nations:

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other casesled by an invisible hand to promote an end which was no part of his intention. (emphasis added)

Cass suggests that Smith wishes to confine the invisible-hand point to circumstances in which the individual invests domestically, writing: “If a capitalist wishes to deploy his capital domestically, and if the domestic investment that will generate the most profit for him is also the one that will create the most value and employ the most people in his country, then we will have a well-functioning capitalist system.” I take it that Cass means only then.

But it is daft to think that Smith thusly confined the invisible-hand idea. As Peter Minowitz has shown when criticizing a similar misreading, the invisible-hand idea is all over Wealth of Nations. Minowitz’s textual analysis refutes Cass’s attempt to confine the point. 

It makes more sense to think that Smith, in propounding a presumption of liberty, assured readers and lawmakers that liberalizations would not lead to an exodus of capital or widespread disruptions of economic life. Smith is saying: Don’t worry, the investor who is free to choose will usually choose domestic anyway. 

Cass motivates his slogans in part by promising that he is protecting American jobs and securing livelihoods. Smith addressed the issue of how freeing up international trade might lead to people in outcompeted businesses being put out of work. What did Smith propose? 

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. 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 which are real encroachments upon natural liberty, and add to these the repeal of the law of settlements, so that a poor workman, when thrown out of employment either in one trade or in one place, may seek for it in another trade or in another place, without the fear either of a prosecution or of a removal, and neither the public nor the individuals will suffer much more from the occasional disbanding some particular classes of manufacturers, than from that of soldiers.

Of Cass’s slogans, Smith would say: “Every such regulation introduces some degree of real disorder into the constitution of the state, which it will be difficult afterwards to cure without occasioning another disorder.”

As Pino writes: “If Cass is unhappy with the results of the bounded market we have, perhaps he’d be open to making the government a little less powerful instead.” Cass might help liberalize any of the 10,000 commandments now obstructing gainful employment and honest living. Then Cass could justly invoke Adam Smith.

Daniel B. Klein

Daniel B Klein

Daniel Klein is professor of economics and JIN Chair at the Mercatus Center at George Mason University, where he leads a program in Adam Smith.

He is also associate fellow at the Ratio Institute (Stockholm), research fellow at the Independent Institute, and chief editor of Econ Journal Watch.

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