Adam Smith, Book 4, Ch. 1, Mercantile Systems

We now move to Book IV, Chapter I,
which is on mercantile systems

or mercantilism.

The chapter is called "Of the Principle
of the Commercial or Mercantile System."

Note that there's also a very short
introduction before this chapter.

Smith lays out the overall
organization of Book IV

and he notes that book IV
will cover two different systems,

the mercantile system and
the agricultural system.

Now, what you're going to see
is that you get 270 pages or so

in my addition on the mercantile system,

and Book IV, Chapter IX, then suddenly,
is a much shorter chapter

on the agricultural system.

So, keep track of
this overall organization.

There'll be chapter after chapter
on the mercantile system.

But this is still part of a broader book
pairing the mercantile system

up against the agricultural system.

Smith really does make his head-on
critique of mercantilism here

and he stresses that wealth
does not consist of gold and silver.

He discusses what we now call
a fallacy of composition.

That, for a single individual,
gold and silver do signify wealth

but for the nation as a whole,

gold and silver are simply
one part of wealth,

wealth in the broader sense referring
to the ability of that nation

to produce valuable goods and services.

Smith then turns to discuss
whether we should prohibit

the exportation of the precious
metals gold and silver.

He considers two points.

First, if say gold is exported
from a country

those metals do not sink to
the bottom of the ocean

never to be recovered,

but, in fact, it's quite often the case
that gold and silver may flow back

into a country in return,
of course, for goods.

Second, Smith considers the point that
gold and silver can be smuggled anyway.

So perhaps the attempt to prohibit
their exportation is doomed to failure.

Now, Smith basically agrees
with these two arguments

but he actually thinks
they don't go nearly far enough

in refuting mercantilist fallacies.

Smith's main critique of mercantilism
in this context is really a broader point

about markets market prices

and it's well expressed by
this quotation and I quote:

"We trust with perfect security
that the freedom of trade,

without any attention of government,
will always supply us with the wine

which we have occasion for;

and we trust with equal security
that it will always supply us

with all the gold and silver which
we can afford to purchase or to employ."

In other words, if you allow
the price system to operate

Smith believes that the proper supply
of the precious metals

will be part of a self-regulating
order governed by market prices.

Smith stresses once again that
the main benefit of trade comes

from the exchange of goods.

Getting what you want more
and giving up what you want less.

That's quite distinct
from the question of

how much gold or silver
is flowing into your country.

Finally, this chapter closes
with a brief taxonomy of

different kinds of import restrictions
and export subsidies.

Smith is going to turn his attention
to these in more detail quite shortly.