The Consequences Of Government Restrictions On Free Trade

Adam Smith was a moral philosopher most famous for pioneering classical economics in his seminal work, The Wealth of Nations. Smith’s central argument was that the free market, guided by the invisible hand, is the best system to maximize prosperity and create most efficient distribution of goods and services by allowing for individuals to pursue their self-interests. Smith’s economic philosophy was especially groundbreaking for his time, as he lived in an era when Europe was dominated by mercantilism, an economic system guided in large part by heavy government intervention in order to maximize their nations’ balance of trade. This essay thus will analyze Smith’s critique of mercantilism, discuss the unintended and harmful consequences of†¦show more content†¦However, this irrational belief, highly popular in Europe at the time of Smith’s writing, gave way to a series of harmful practices due to the general impulse to accumulate gold and sil ver at all costs. First, he notes that most European nations had either completely prohibited or strictly taxed the exportation of precious metals to foreign countries (Smith IV 1.5). This, of course, was one of the easiest ways of â€Å"protecting† their domestic supply of precious metals, simply by banning them from leaving the country. However, the effect of this was negative, particularly on the miners and merchants of these metals, who â€Å"could frequently buy more advantageously with gold and silver than with any other commodity the foreign goods which they wanted, either to import into their own, or to carry to some other foreign country† (Smith IV 1.5). While prohibiting one specific medium of exchange (such as gold) from being used to make foreign transactions does not make trade impossible, it simply makes it much more difficult and costly, as they must rely more on bartering. Furthermore, Smith notes that these restrictions often failed, as gold and silver can be smuggled out of the country, albeit at a much higher cost to the economy as a whole. Additionally, Smith notes another harmful consequence of European mercantilism, the high propensity of protective tariffs. The rationale behind this is to give domestic industries a competitive edge