Adam Smith and the Republican Presidential Candidates

In the 1980s Reagan Republicans were fond of wearing Adam Smith neckties. (I personally still have two hanging in my closet that hail from that era.)   Adam Smith, of course, was the 18th Century Scotsman who wrote An Inquiry into the Nature and Causes of the Wealth of Nations, a book considered by many to be the founding work of modern economics. Wearing the Adam Smith neckties was intended to display fidelity to Smith’s ideas and, in particular, fidelity to free markets.

One does not see many Republicans wearing these neckties anymore. Perhaps this loss of ubiquity is to the good, however. After observing the large crop of Republican presidential candidates over the past several months, I can only conclude that none of them is particularly well informed by Smith’s ideas. Indeed, I suspect that few, if any, have ever read The Wealth of Nations. Some of the candidates indeed display an extraordinary degree of economic illiteracy.

The central thesis of The Wealth of Nations is that a nation’s economic well-being is measured not by its store of gold (or other financial assets), the amount of goods it exports, or the number of jobs that exist within its borders, but rather a nation’s economic well-being is determined by the quantity of goods and services available for consumption by its populace. In the book, Smith makes the point that the ultimate purpose of all economic activity is to satisfy human wants and needs. That is, the reason that economic activity takes place is so that people can consume. Work and production are means to that end, but not ends in themselves. They are properly considered costs, not benefits. Put another way, in a world in which resources are scarce, employment of human labor and other necessary factors of production are what a nation must give up in order to consume.

Thought of in this way it becomes clear that if a nation can reduce the number of labor hours (or the employment of any other resource) required to maintain a particular rate of output of consumer goods and services, those freed up resources can then be used to increase the output rate even further, thus allowing the nation to become wealthier. One way by which such an expansion of wealth might occur is through the adoption of new technology that increases productive efficiency. The efficiency is manifested in higher labor productivity and potentially an increase in the productivity of other resources as well. Technological innovation may also yield higher quality products, or the introduction of entirely new goods and services.

Another way by which a nation’s wealth can increase is by trade with another nation that has a comparative advantage in the production of certain goods. In this case, both nations gain by taking advantage of each other’s relative productive efficiencies. The trade consists of one nation giving up some of its wealth by exporting goods produced out of its scarce resources in exchange for imports of higher-valued goods from the other nation produced out of that nation’s scarce resources. Each nation sacrifices some of its wealth in order to obtain something in return that it values higher. The result is that each nation becomes wealthier.*

As Smith taught, exports then are a cost to a nation; imports a benefit. When a nation exports, it is using up its scarce resources for the benefit of another nation’s consumers. When a nation imports, it is enjoying the consumption of goods produced from the scarce resources of some other nation. Properly considered, exports are the goods that a nation must sacrifice to pay for its imports.

The principal lesson here is that a nation that can become more efficient in supplying consumer goods to its people becomes wealthier. Whether that efficiency comes about because of new technology or because of international trade, the savings in resource use, including labor, permits an expansion in the nation’s wealth through redeployment of those resources to the production of still other goods and services. **

Regrettably, none of the Republican candidates for president evinces much awareness of this basic lesson from The Wealth of Nations. What they say instead are repeated promises to “create” jobs and artificially promote exports, presumably beyond that rate required to pay for imports. In other words, they promise that, if elected, they would make America poorer.

To be sure, individuals want jobs because they know that they have to work in order to have income to obtain the consumer goods and services that they need and want. They must exchange their labor for those goods and services.  This necessity is a fact of life in a world of scarcity.

But political leaders who respond with promises to focus directly on creating jobs, including jobs derived from exports, will largely fail to keep those promises. Bearing out Smith’s ideas, economic history and experience show that job opportunities expand most when a society focuses first on increasing efficiency over time. The proven mixture is technological advancement, free trade, and minimal government-imposed burdens on entrepreneurship and other economic activity. These factors along with other necessary conditions such as the rule of law are the recipe for a growing and ever wealthier economy. More jobs are, in turn, the byproduct of this process of economic growth.***

It would be refreshing if at least one of the Republican candidates for president evinced an understanding of these tested principles and could articulate them in a compelling manner. Instead, we get empty promises to create jobs and pursue programs that hinder trade with other nations. It is indeed appropriate that none of them wears an Adam Smith tie.

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* In the modern global economy, trade of course takes place multinationally and is not goods for goods but rather is financed by means of international currencies and other monetary instruments. This permits nations to trade indirectly with each other. It also means that settlements need not occur instantly but can take place over time. So, for example, one nation may export in one period, but rather than import in the same period simply hold claims on another nation’s goods to be redeemed in a later period.   Nonetheless, the basic wealth-creating principles of trade as discussed above continue to hold.

** For a notable illustration of this principle, simply consider how technology has improved agriculture and thus permitted the expansion of non-agricultural production.   Were we still to employ the agriculture technology of 1900, many more people would still have to be working on farms instead of producing the variety of consumer goods that we enjoy today. In other words, advances in agricultural technology throughout the 20th Century freed up the resources, including labor, that permitted the development and supply of that century’s wide-ranging new industries, products, and services. Indeed, a politician who his dead set on “creating” jobs could ensure full employment simply by outlawing the use of tractors. It would not be a situation that most of us would want to endure, but it certainly would create full employment.

*** For example, over time new labor saving technology most often actually expands total labor employment. It does this in two ways. First, in that area where the new technology is applied, the increase in labor productivity reduces per unit costs, and thus consumer prices. With lower prices, quantity demanded increases and more output is sold. Although labor hours per unit of output are fewer as a consequence of the new technology, the higher output rate often means that total labor hour employment grows. Second, the increase in labor productivity in one area frees up resources for expanding output rates, and hence labor employment, in other areas, including new and developing industries where job opportunities may increase dramatically.

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