Adam Smith and the crisis of mercantilism

Smith was right in thinking that his work would have little popular appeal. Popular opposition to the corruption of the state, to the abuse of power and, above all, to the burden of taxation, was expressed in the voice of democratic political theory without needing any sophisticated economic theory to articulate its grievances. Moreover Smith had considerably overestimated the extent to which the system of mercantilism presented a barrier to the development of capitalism. The stagnation of foreign trade between 1750 and 1780 did not seriously inhibit economic growth as domestic sources of expansion were mobilised, with more rapid agricultural improvement, the beginnings of the industrial revolution, and the development of domestic financial institutions, in the form of the country banks. The panoply of domestic protective regulations that Smith saw as such a formidable barrier to the freedom of capital and labour simply dissolved in the face of capitalist development, despite the resistance of the working class (sometimes supported by sympathetic magistrates), while the Poor Law proved an invaluable complement to the militia in maintaining order as the working class suffered the costs of industrial and agricultural revolution. In the last two decades of the eighteenth century outlets for the increasing production of capitalist industry and agriculture were found not so much in domestic as in foreign markets, taking advantage of the commercial supremacy that was the legacy of mercantilism.

The appeal of The Wealth of Nations was not so much to the forces struggling against the parasitic and corrupt state, as to the state itself. Ironically the book was published in 1776, the year in which the American Revolution removed the lynchpin of the colonial system. The cost of the American War provoked escalating popular opposition, that drew increasingly radical inspiration from the democratic principles of the rebels. The final discrediting of the doctrines of mercantilism and the humiliation of the state with the defeat in America precipitated an ideological crisis. Smith's new system provided a means of resolving the crisis. The loss of the American colonies could immediately be reinterpreted, on the basis of Smith's theory, as a liberation from the burden of colonial responsibility, opening up new possibilities of increasing trade by liberalisation rather than control. The critique of the colonial system could even be used to justify the French Wars, in the name of opening up markets to the freedom of trade. The reduction of prohibitive duties could increase revenues by stimulating the growth of trade and discouraging smuggling.

The discrediting of the colonial system, the eclectic pragmatism of Smith's work, and his endorsement of the existing constitution, made it easy for the principles of The Wealth of Nations to become established as the new political orthodoxy, and to provide a theoretical basis for the programme of `economical reform' that responded to popular protest against the burden of taxation and the corruption of the state. The enormous expansion of trade in the wake of American independence, with exports increasing fivefold, and the financial and political success of economical reform, enhanced the prestige of Smith's principles. From the late 1780s these principles came to be accepted by government as the basis on which to determine the fiscal, commercial and financial policies of the state, although they were always to be tempered in their application by pragmatic consideration of the circumstances.

The espousal of the principles of free trade and economical government did not prevent the state from continuing to protect domestic industry and agriculture or from using the military, political and financial power of the state to secure commercial domination for the benefit of a wider range of capitalist interests. The East and West Indian colonies retained their importance as sources of supply and of colonial plunder, and there were few demands for their liberation. There was little opposition from capitalists to the long drawn out, and very costly, French wars at the turn of the century, which set the seal on British commercial supremacy for almost a century. Similarly there was no resistance to the use of the political and military power of the state to maintain commercial domination in North America, and later in support of the displacement of Spanish by British interests in Latin America. Tariff protection assisted the early development of important new industries. Even when the introduction of more advanced methods of production made tariff barriers anachronistic, they were maintained for revenue purposes and, despite limited liberalisation, there were few demands for their removal before the second quarter of the nineteenth century.

Economical reform and savage repression, supported by patriotic and religious chauvinism, secured the financial and political stabilisation of the state during the French Wars. Although lip-service was paid to Smith's principles, they had had little practical impact. It was the problems created by the French Wars, and particularly the problems of post-war reconstruction, that led to the adoption of a more radical anti-state ideology of laissez-faire. But again this ideology was not pressed by the capitalist class, but was adopted enthusiastically by the Tory governments of Lord Liverpool.

The Napoleonic Wars provided an enormous stimulus to capitalist development. Wartime demand gave a great boost to the growth of domestic production and the Continental blockade led to the opening up of new export markets. Agriculture too expanded rapidly during the war, particularly by increasing the area under cultivation. The enormous borrowing of the state to meet the needs of war stimulated the growth of banking and financial institutions

The ending of the war created acute difficulties. Agricultural overproduction had already appeared with a collapse of prices in 1813, and agriculture remained in depression for another twenty years. The loss of military contracts hit several industries, while inflation had weakened the competitive advantage of exporters. The financial instability associated with the enormous increase in the government debt and the suspension of convertibility in 1797 was a barrier to the growth of trade. Bouts of depression in 1816, 1819 and 1826 led to widespread distress and to increasingly menacing rural and urban unrest, which found allies among the more conservative elements of the ruling class, who saw distress and disorder as the inevitable consequence of the breakdown of the traditional society with the unfettered advance of capital.

The immediate response of the state to these problems was essentially conservative. Agricultural depression was to be alleviated by the strengthening of the Corn Laws which protected domestic agriculture from foreign competition. Disorder was met by severe repression, while the distress that fuelled disorder was alleviated by the Poor Law. The regulation of the monetary system was left to the bankers. Overall the state assumed little responsibility for economic management beyond its traditional role of securing British commercial supremacy.

Such an attitude of disengagement could not last for long. The Corn Laws were ineffective in supporting an agriculture whose problems derived from domestic overproduction as much as from foreign competition. Depression, distress and disorder led to pressure for government action. The cost of the Poor Law meant a steady rise in parish rates, on top of the increased burden of taxation required to meet government's current expenditure and the servicing of its debt. Moreover the programme of economical reform had reduced the scope for ministerial patronage, while the growth of the press and of organised public opinion brought popular pressure to bear on the government, to which the latter had increasingly to respond. The government was also under financial pressure. Monetary instability fuelled financial speculation, creating difficulties for the financing of the government debt, while political resistance prevented the government from increasing levels of taxation. It soon became clear that the political and financial stability of the government could only be secured by the more active intervention of the state to secure the conditions for the sustained growth of prosperity. It was in this context that political economy took up the challenge, going beyond Smith's critique of the commercial system to develop a theory within which the appropriate role of the state in the regulation of the economy could be considered. The leading role, in both theoretical analysis and political debate, was played by Ricardo until his death in 1823.