Adam Smith on how trade makes us better people

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2023 is the 300th anniversary of Adam Smith’s birth. This post is part of a series highlighting aspects of Smith’s thought that continue to influence liberal thought in general, and CEI’s work in particular. Part 1 on the real Adam Smith is here. Part 2 on Smith and American bureaucracy is here. Part 3 on Smith’s concepts of love and loveliness is here. Part 4 on how some German scholars have misunderstood Smith is here. Part 5 on how America has benefited from Smith’s insights is here.

Economists love efficiency. That is why most of them love free trade. Countries with relatively free trade also tend to be wealthier than more protectionist countries. But there is more to life than maximizing utility. Today’s economists should take a cue from Adam Smith, the father of free trade. For him, trade is about more than efficiency. It is also about empathy.

Smith’s larger project was human cooperation. Trade is a key ingredient in Smithian liberalism, and many of the reasons why have little to do with efficiency.

First and foremost, trade respects individual dignity. If another person has something you want, there are two ways you can get it. One is to take it by force. The other is to trade them something they value in return. Actually, it’s better than that. You have to give them something they value even more than what they give up. You won’t bother with this unless you have enough empathy and compassion to engage with other people on equal terms.

To do this, you have to see things from their point of view. You have to make an effort to understand their values, even if they differ from yours. Then you have to sweet-talk them in ways that appeal to them, not you. You have to be able to have a two-way conversation with the other person. You not only need to say what you want, you have to listen to what they want. Smith found these empathetic parts of trade far more interesting than the efficiency gains.

Trade doesn’t work without property rights, which are another staple of liberal (in the correct sense) economics. As the Smith-influenced scholar Bart Wilson points out, even property is more about empathy than efficiency. It’s a cliché to point out that dogs know what property rights are. Just try and take away their stick and see what happens. That dog is saying “this is my property.”

But Wilson, in Smithian spirit, says that this is only half the story. The idea of property has two parts: “This is mine, and that is yours.” It is both of those things. Dogs do not do that; humans do. Again, a Smithian concept of property rests on treating other people with dignity. Property is not selfishness. It is a social custom based on cooperation. It also happens to be economically efficient.

Peace is human cooperation on a national scale. Trade between individuals not only helps to build peace among countries, it helps to sustain it. The very first thing McDonald’s teaches its teenage employees is, don’t kill the customer. It’s bad for business. Instead they are told to be helpful and polite.

The deeper two countries’ trade ties are, the less likely they are able to go to war. Voltaire, the French philosopher who met Smith in the 1760s, made a similar point in one of his most famous quotes:

Go into the London Stock Exchange – a more respectable place than many a court – and you will see representatives from all nations gathered together for the utility of men. Here Jew, Mohammedan and Christian deal with each other as though they were all of the same faith, and only apply the word infidel to people who go bankrupt.

Smith might not have approved of the infidels valuing only money, but he would have enthusiastically endorsed trade as a way to promote tolerance and cooperation. Trade can turn enemies into friends, as Mises and Hayek would both point out in the 20th century.

Trade is not a guarantee against war, as we are finding out with Russia’s Ukraine invasion. Both countries until recently had McDonald’s. The larger point holds. War and violence have both been in long-term decline, with rising commerce playing an important role, as Steven Pinker documented in The Better Angels of Our Nature, as well as Michael Shermer in The Moral Arc.

Being nice to people is good for business. It also gives people moral practice, as Virgil Storr and Ginny Choi argue in their Smith-influenced book Do Markets Corrupt Our Morals? Successful trader are trustworthy, and can trust in others. They listen to what other people want, and try to provide it. They practice persuading people.

Cheating and stealing might work once. But getting a bad reputation can be death in the marketplace. These are all learned skills. They take practice, and markets are moral playgrounds where people can do exactly that.

Steve Horwitz, who won CEI’s Julian Simon Memorial Award in 2020, loved to tell a story about the double thank you of the market, that little moment when customer and employee both thank each other:

But in the market, the Double Thank You says something different. That turkey is not a gift, as the grocer gets my $9 per pound in return. It is instead a mutually beneficial exchange. We are genuinely thanking each other for having made us each better off. I am happier with the turkey than the $9 and the grocery store prefers the $9 to the pound of turkey. When we thank each other, we genuinely mean it. We are both grateful for the exchange.

Trade makes strangers cooperate every day. It also makes people richer. Those material gains are important. They let people live longer, more comfortable lives, and pursue their versions of lives well lived. But as Smith and his intellectual descendants point out, it is the moral goodness behind trade that makes all that efficient wealth creation possible.