Marking the 250th anniversary year of the publication of the Wealth of Nations, in the second of a series of blogs on the contemporary relevance of Adam Smith’s work, the Insights team take a look at his nuanced, changing assessment of the English Navigation Acts. These were restrictions on freedom of trade introduced in the mid 17th century, not fully repealed until the mid 19th century.
Smith described the Wealth of Nations (WoN) as “a very violent attack … upon the whole commercial system of Great Britain”. His critique of Mercantilism remains well known, but it is sometimes interpreted as advocacy of free trade in virtually all circumstances, notwithstanding a clear, general statement in the WoN to the effect that complete freedom of trade is a utopian ideal, even within the narrow market of Great Britain.
That such a simplistic interpretation is false is also indicated, in a more forensic way, by Smith’s assessment of the English (later, post-Act of Union, British) Navigation Acts of the 17th century. These were pieces of legislation that served to foreclose the transport of goods into and out of Britain and its colonies by foreign shippers, enacted sequentially in 1651,1660,1663,1673, and 1696. They were only finally repealed in 1849.
The Acts were mercantilist restrictions of trade, yet in the WoN Smith wrote of the 1660 legislation that: “… the act of navigation is, perhaps, the wisest of all the commercial regulations of England.” So, what’s the argument here?
It’s not that the economic costs of restrictions of trade have somehow vanished in the context of navigation. The general critique of mercantilism as a depressing factor on the wealth of the nation (and its growth) remains valid. It’s rather that there can be other factors in play that pose a bigger threat to that wealth, via their negative, whole-system (‘systemic’) effects, warfare being the primary example.
Smith explains as follows: “… some particular sort of industry is necessary for the defence of the country. The defence of Great Britain, for example, depends very much upon the number of its sailors and shipping. The [1660] act of Navigation, therefore, very properly, endeavours to give the sailors and shipping of Great Britain the monopoly of trade of their own country.” And immediately before the “wisest of all” judgment, he expressed the view that “defence is of much more importance than opulence …”.
Thus, while the WoN is indeed a violent assault on the mercantile system of the Britain of his day – a system that, at the time of writing, encompassed major British colonies: they were part of the ‘nation’ – the purpose of the “attack” is to encourage remediation of one of its major dysfunctions, not to advocate the wholesale disruption of the system (as might occur in consequence of defeat in war).
The context for the introduction of the Navigation Acts is important for understanding Smith’s assessment of them. The timings of the first two reflect the high point of Dutch naval power, when there was a fierce rivalry in shipping between England and Holland, which did indeed spill over into war. There were three Anglo-Dutch wars of the time, in 1652-1654, 1665-1667, and 1672-1684, the second of which saw some notable Dutch victories, for example, the Raid on the Medway (June 1667), rated one of the worst defeats in the history of the Royal Navy. There was a real and present danger of invasion from the near continent to be considered, as well as the negative commercial consequences of possible Dutch naval dominance for the future economic development in the colonies.
Smith’s thinking can be summarised as follows. Restrictions of trade can be expected to boost the profits of those who are protected by them. That draws more resources into the supported activities than would have otherwise been the case. But the flip side of the coin is that resources will be drawn from other areas, depressing their economic development. From a wider, whole-system perspective – a perspective that was always uppermost in Smith’s mind – the net effect on the wealth of the nation and its evolution can be expected to be negative, not least because it creates weakened incentives for the discovery and taking of new opportunities in more novel areas of economic activity (like manufacturing in Smith’s time).
Nevertheless, there can be occasions/contexts when the allocation of extra resources to protected activities is the appropriate thing to do, as when the functioning of the whole commercial system itself is (whatever its current functionality) at serious risk of degradation. As guardian of the system, it is a proper function of government to take account of, and respond to, the trade-offs that arise from the presence of significant systemic risk.
Smith began writing the WoN about a century after the first Navigation Act, in a rather different context in which the structure of the trade-offs had changed radically since 1660: British naval power had waxed, Dutch naval power had waned, and the American part of the ‘nation’ had grown substantially. The facts had changed, so his policy assessment changed, ending with the view that “Some moderate and gradual relaxation of the laws which give to Great Britain the exclusive trade to the colonies, till it is rendered in a great measure free, seems to be the only expedient which can, in all future times, deliver her from this danger [of systemic disruption].”
These were wise words, but they came too late in time to mitigate the subsequent disruption. Democratic governments are ever slow to detect the shifting trade-offs, and that is a feature of theirs that still today merits remediation.