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October 30, 2006
Adam Smith on trade protection as rent seeking
Returning visitors will immediately recognize that this post was inspired by these comments. In The Wealth of Nations, Adam Smith has a lot to say about "rent". In fact, Smith spends the whole of Chapter 11 of Book I on the subject. This rent of which he writes is a term for the returns to a fixed factor. For example, mineral wealth taken out of the ground returns rent to the landowner. In economic parlance, rent is often synonymous with profit. While most of the time there is no confusion from this, economists (and non-economists) also use the term "rent seeking" to describe behavior that is wasteful and decreases social welfare. When speaking of "rent seeking", they are not talking about the normal types of profit maximization behavior. Nor are they referring to the division of labor so eloquently described by Adam Smith. Behavior that Adam Smith praised in The Wealth of Nations (prudence, self-betterment, etc.) is not identical to the rent seeking behavior described by scholars such as Tullock and Krueger. The fact that the word "rent" is used in both contexts is perhaps unfortunate, but too solidly entrenched in the literature and the minds of economists to ever change. I believe that most economists are careful about the difference. Outside the profession, however, I think there may be some confusion that ends up giving economics a bad reputation.
As I pointed out last year in an Econoblog with Russell Roberts,
"The Theory of Moral Sentiments," on the other hand, is a treatise on temperance. It is a study of propriety, sympathy, and justice. Sadly, many people don't even know the book exists or that it was written by the man who is sometimes called the "father of capitalism." Ignorance of Smith's other major work leads people to think that economics is only about greed, self-interest, and rational maximization. As a result, many intelligent people who would be quite capable of becoming economically literate are turned off to economics because they see it as promoting a "greed is good" mentality that doesn't square with their world view. Unfortunately, this perception is so well embedded in the pop culture view of economics and economists that it may be very difficult to reverse.
While it helps to read The Theory of Moral Sentiments to reinforce the fact that Adam Smith was no Gordon Gecko, it is not really necessary. Only a misreading of The Wealth of Nations would cause someone to think economics is about "greed." Greed and self-interest are not identical ideas. Greed is self-interest run amok--self-interest with no temperance.
Consider first what Smith said in comparing trade protection to monopoly. After all, giving trade protection increases the market power of the domestic firm.
To give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation. (Book IV, Chapter 2, paragraph 11)
Since Smith lived 200 years before Tullock and Krueger, he did not frame the discussion in precisely the same terms, but the notion of rent seeking as a destructive influence is present in The Wealth of Nations. It is in one of my favorite passages in the entire text. The context is a discussion of barriers to trade. I was first introduced to this passage in my 2nd year of grad school, and it has been with me ever since. Combined with the previous passage, it shows that Smith took a dim view of what we would today call "rent seeking," but correctly saw that it would always be with us as a thorn in our side.
To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it. Were the officers of the army to oppose with the same zeal and unanimity any reduction in the numbers of forces with which master manufacturers set themselves against every law that is likely to increase the number of their rivals in the home-market; were the former to animate their soldiers in the same manner as the latter enflame their workmen to attack with violence and outrage the proposers of any such regulation, to attempt to reduce the army would be as dangerous as it has now become to attempt to diminish in any respect the monopoly which our manufacturers have obtained against us. This monopoly has so much increased the number of some particular tribes of them that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature. The Member of Parliament who supports every proposal for strengthening this monopoly is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists. (Book IV, Chapter 2, paragraph 43)
Posted by William Polley at October 30, 2006 11:18 AM
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Comments
I agree with your post and I am glad to see that someone is reminding us of the differences between economic rent as conventionally understood among economists and 'rent seeking' which appears to cover whatever nefarious practices people get up to in pursuit of their self-interest (which it was never Smith's intention to bless whatever people did - it can be benign or malign in practice).
Smith gives many details of of the 18th century practices of people engineering events and circumstances to their own enrichment at the expense of consumers. The quotation you make showing his belief that the possibilities of ever being able to relax vigilence against monopoly attemtps, including protection, was part of his social evolutionary approach, in which certain practices appear to be entrenched because of the short life spans of humans observing them, and the historical fact that no sooner (usually later!)is one practice stopped or curbed than another pops up elsewhere.
Technology also changes circumstances and new forms of competition emerge (witness the current 'file sharing' row over copyrights).
Posted by: Gavin Kennedy at October 31, 2006 10:21 AM
I guess from your post you are suggestng that reversing the unilateral Asian/Trans-national platform structure that is detroying the US middle class is anti - "free trade".
Trade is a bi-lateral process. The simple export/impot imbalance between the US and China/Japan/Asia does not qualify as trade. The gross manipulation of the world's currency markets and the anti-import practices of these countries makes reference to the current situation as "free" is a joke.
Your inference that America should continue to allow the mercantilist practices (monopoly) of corporatist/Asian to destroy the fabric of our society is wrong and a complete misinterpretaion of Adam Smith's treatise. What we have is an anti-trade, a point of view that I hink is much closer to what Adam Smith is really saying. Monopolist practices are the bad thing, whether prcticed by the impoter or exporter coutry.
No one likes war, it is a destructive and ultimately ruinous endeavor. Does that mean that we should have sat idly by while Hitler and Japan destroyed the US and our way of life. Of course not.
Academic economists in general, have promulgated a disturbingly myopic, Neveille Chamberlain tolerance to the anti-trade. Their interpretaion of Adam Smith can be likened to the interpretation of the Koran by fundamentalist, Muslim terrorists.
If the Academics or so enamored of "free trade", why do they fight to the death to maintain the tenure system. I'm sure we could hire some Chinese academics at one tenth the price to provide as good a service.
Posted by: zinc at November 5, 2006 7:59 AM
I guess from your post you are suggestng that reversing the unilateral Asian/Trans-national platform structure that is detroying the US middle class is anti - "free trade".
Trade is a bi-lateral process. The simple export/impot imbalance between the US and China/Japan/Asia does not qualify as trade. The gross manipulation of the world's currency markets and the anti-import practices of these countries makes reference to the current situation as "free" is a joke.
Your inference that America should continue to allow the mercantilist practices (monopoly) of corporatist/Asian to destroy the fabric of our society is wrong and a complete misinterpretation of Adam Smith's treatise. What we have is an anti-trade, a point of view that I think is much closer to what Adam Smith is really saying. Monopolist practices are the bad thing, whether practiced by the importer or exporter country.
No one likes war, it is a destructive and ultimately ruinous endeavor. Does that mean that we should have sat idly by while Hitler and Japan destroyed the US and our way of life. Of course not.
Academic economists in general, have promulgated a disturbingly myopic, Neveille Chamberlain tolerance to the anti-trade. Their interpretaion of Adam Smith can be likened to the interpretation of the Koran by fundamentalist, Muslim terrorists.
If the Academics or so enamored of "free trade", why do they fight to the death to maintain the tenure system. I'm sure we could hire some Chinese academics at one tenth the price to provide as good a service.
Posted by: zinc at November 5, 2006 8:04 AM
Economists Are Destroying America
Economists, politicians, and executives from both parties have promised American families that “free” trade policies like NAFTA, CAFTA, and WTO/CHINA would accomplish three things:
• Increase wages
• Create trade surpluses (for the US)
• Reduce illegal immigration
Well, their trade policies have been in effect for about 15 years. Let’s review the results:
• Declining real wages for 80% of working Americans (while healthcare, education, and childcare costs skyrocket)
• A record-high 46 million Americans who don’t have health insurance (due in part to declining wages and benefits)
• Illegal immigration out of control
• Soaring trade deficits, much with countries that use slave and child labor
• Personal and national debt both out-of-control
• Global environments threatened by lax trade deal enforcement
Economists Keep Advocating Policies That Aren’t Working
Upon seeing incontrovertible evidence of these negative trade agreement results, economists continue with Pollyannish blather. Some say, “Cheer up! GDP is up and the stock market’s doing fine.” Others say, “Be patient. Stay the course. Free trade will raise all ships.”
Even those economists who acknowledge problems with trade agreements offer us only half-measures—adjusting exchange rates, improving safety nets, and providing better job retraining. None of these will close the wage gap in America—and economists know it.
Why Aren’t American Economists Shouting From Street Corners?
America needs trade deals that support American families and businesses in terms of wage, environmental, and intellectual property abuses. Why aren’t economists demanding renegotiation of our trade deals? There are three primary reasons:
• Economists are too beholden to corporations and special interests that provide them with research grants.
• Economists believe—but refuse to admit—that sacrificing the American middle class is necessary and appropriate to generate gains in third world economies.
• Economists refuse to admit they make mistakes.
Economic Ambulance Chasers
Now more than ever, Americans need their economists to speak truth and stand up to their big business clients. Instead, economists sound like lawyers caught chasing ambulances: they claim they’re “doing it for our benefit”.
Posted by: John Konop at November 9, 2006 6:53 PM