The Economic Theory Based Entirely on Sentimental Hope – Smith vs. Ricardo

Is it strange that classical English economists Adam Smith and David Ricardo based a lot of their economic theory on sentimental hope? That the capitalists of their time would make economic decisions based on their sense of patriotism?

Adam Smith considered the possibility that the merchants and manufacturers in England might decide to do their business abroad, invest abroad and import from abroad. He said they would profit but England would be harmed. However, England would be saved the ravage of what we today call “neoliberal globalization” because an “invisible hand” would sway merchants and manufacturers to operate in their own country.

Yep. Smith said that something would happen to the merchant which will compelled him to invest in his home nation instead of abroad. Smith called that something the “invisible hand”.

Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Book IV, Chapter 2:

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. 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 cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

It’s hard to miss the message in this passage. It’s the only occurrence of the phrase “invisible hand” in the entire work.

The other great classical economist David Ricardo recognized the same problem with neoliberal globalization and, like Adam Smith, simply hoped it wouldn’t happen:

David Ricardo, On the Principles of Political Economy and Taxation (1817), Chapter 7: On Foreign Trade:

Experience, however, shews, that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connexions, and intrust himself with all his habits fixed, to a strange government and new laws, check the emigration of capital. These feelings, which I should be sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations.

There you have it. We will all be saved by the goodness inside the hearts of our local capitalists.

Thanks for reading,

 

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