Book IV, Chapter II, 1

Of Restrictions on Importation from Foreign Countries of Goods That Can Be Produced at Home.

Restricting imports of goods that can be produced at home, whether through high duties or outright prohibitions, secures a greater or lesser monopoly of the domestic market for the industries that produce them. Thus the ban on importing live cattle or salted provisions from abroad secures for Great Britain's graziers a monopoly of the domestic market for meat. High duties on imported corn, amounting to a ban in times of moderate plenty, give growers of corn a similar advantage. The ban on imported woolen goods likewise favors woolen manufacturers. Silk manufacturers, although they use entirely foreign materials, have recently gained the same advantage. Linen manufacturers have not yet gained it but are moving rapidly toward it. Many other branches of manufacture in Great Britain have similarly gained a complete or nearly complete monopoly over their fellow countrymen. The variety of goods whose importation into Great Britain is prohibited, either outright or in certain circumstances, greatly exceeds what anyone unfamiliar with customs laws might imagine.

There can be no doubt that this domestic monopoly often strongly encourages the particular industry that enjoys it and directs more of society's labor and stock into that industry than would otherwise flow there. But whether it increases society's industry as a whole, or directs it to the best advantage, is far less clear.

Society's total industry can never exceed what its capital can employ. The number of workers any one person can keep employed must bear a certain proportion to that person's capital. Likewise, the number that all members of a great society can keep employed must bear a certain proportion to society's total capital, and can never exceed it. No trade regulation can increase the amount of industry in a society beyond what its capital can sustain. It can only divert some of that industry onto a course it might not otherwise have taken; and there is no certainty that this artificial course will serve society better than the one industry would have followed of its own accord.

Each person constantly seeks the most advantageous use for whatever capital he controls. His object is indeed his own advantage, not society's. Yet the pursuit of his advantage naturally—or rather necessarily—leads him to prefer the employment most advantageous to society.

First, each person tries to employ his capital as close to home as he can, and therefore to support domestic industry as far as he can, provided he can obtain the ordinary profits of stock, or profits not much below them.

Thus, when profits are equal or nearly equal, a wholesale merchant naturally prefers domestic trade to foreign trade for consumption, and foreign trade for consumption to the carrying trade. In domestic trade his capital is never so long out of his sight as it often is in foreign trade for consumption. He knows better the character and circumstances of those to whom he extends credit; if deceived, he is better acquainted with the laws under which he must seek redress. In the carrying trade, the merchant's capital is, as it were, divided between two foreign countries. None of it need ever be brought home or placed directly under his eye and control. A merchant in Amsterdam who uses his capital to carry corn from Koningsberg to Lisbon, and fruit and wine from Lisbon to Koningsberg, must generally keep half of it in Koningsberg and the other half in Lisbon. None of it need ever reach Amsterdam. Such a merchant's natural residence would be either Koningsberg or Lisbon; only very particular circumstances could make him prefer Amsterdam. Yet his discomfort at being so far from his capital generally prompts him to bring to Amsterdam some of both the Koningsberg goods bound for Lisbon and the Lisbon goods bound for Koningsberg. This entails loading and unloading twice, as well as paying some duties and customs charges. But to keep at least some of his capital constantly under his own eye and control, he willingly bears the extra expense. In this way, every country with a considerable share of the carrying trade always becomes an emporium, or common market, for the goods of all the countries whose trade it carries. To avoid a second loading and unloading, the merchant tries to sell as much as he can of all these countries' goods in his domestic market, thereby converting as much of his carrying trade as possible into foreign trade for consumption. Likewise, a merchant engaged in foreign trade for consumption who gathers goods for foreign markets is always glad, when profits are equal or nearly equal, to sell as much of them at home as he can. To the extent that he converts foreign trade for consumption into domestic trade, he avoids the risks and trouble of export. Home is thus, if I may put it so, the center around which the capital of every country's inhabitants continually circulates and toward which it always tends, though particular causes may sometimes drive it away toward more distant uses. As already shown, capital employed in domestic trade necessarily sets more domestic industry in motion and provides revenue and employment to more inhabitants than the same amount employed in foreign trade for consumption. Capital employed in foreign trade for consumption has the same advantage over an equal amount employed in the carrying trade. Thus, when profits are equal or nearly equal, each person naturally tends to employ his capital in the way most likely to support domestic industry and provide revenue and employment to the greatest number of his fellow countrymen.

Second, each person who employs his capital to support domestic industry necessarily tries to direct that industry toward producing goods of the greatest possible value.

The output of industry is the value it adds to the materials it works upon. The employer's profits rise or fall with the value of that output. But a person employs capital in industry only for profit. He will therefore always try to support the industry whose output is likely to have the greatest value, or to exchange for the greatest amount of money or other goods.

Yet the annual revenue of every society is exactly equal to the exchange value of its entire annual industrial output—or, more precisely, it is that very value. Each person therefore strives, as far as he can, both to use his capital to support domestic industry and to direct that industry toward the most valuable output. In doing so, each necessarily works to make society's annual revenue as large as he can. He generally neither intends to serve the public interest nor knows how much he serves it. In preferring domestic to foreign industry he seeks only his own security; in directing that industry toward the most valuable output he seeks only his own gain. In this, as in many other cases, he is led by an invisible hand to advance an end that was no part of his intention. Nor is society always worse off because he did not intend it. In pursuing his own interest he often advances society's interest more effectively than when he actually means to advance it. I have never known much good to come from those who professed to trade for the public good. It is an affectation not very common among merchants, and few words are needed to discourage them from it.

A person in his own locality can plainly judge much better than any statesman or lawgiver which domestic industry his capital can support and which is likely to produce the most valuable goods. A statesman who attempted to tell private people how to employ their capital would not only assume a wholly unnecessary burden of attention; he would claim an authority that could safely be entrusted to no single person, nor to any council or senate whatsoever. Nowhere would it be more dangerous than in the hands of a man foolish and presumptuous enough to think himself fit to exercise it.

To grant a monopoly of the domestic market to the output of any particular domestic art or manufacture is, to some extent, to tell private people how to employ their capital. Such a regulation must almost always be either useless or harmful. If domestic industry can supply the market as cheaply as foreign industry, the regulation is plainly useless. If it cannot, the regulation must generally do harm. Every prudent head of a household follows the maxim never to make at home what costs more to make than to buy. The tailor does not make his own shoes but buys them from the shoemaker. The shoemaker does not make his own clothes but hires a tailor. The farmer makes neither shoes nor clothes but employs both craftsmen. All find it in their interest to devote their labor to work in which they have an advantage over their neighbors, and to buy everything else they need with part of what they produce—or, equivalently, with the proceeds from selling part of it.

What is prudent in every private household can hardly be foolish in a great kingdom. If another country can supply us with a good more cheaply than we can make it ourselves, we do better to buy it with some of the output of our own industry, employed where we have an advantage. The country's total industry, always proportionate to the capital employing it, will not thereby be reduced, any more than the work of the craftsmen just mentioned is reduced. It will merely be left to discover its most advantageous use. It is certainly not employed to best advantage when directed to produce something that can be bought more cheaply than it can be made. The value of its annual output necessarily falls, to a greater or lesser extent, when it is diverted from making goods plainly more valuable than the goods it is made to produce. By assumption, the latter goods could be bought from other countries for less than they cost to make at home. They could therefore be purchased with only part of the goods—or, equivalently, part of the proceeds of the goods—that an equal amount of domestic capital would have produced if industry had been free to take its natural course. The country's industry is thus diverted from a more advantageous to a less advantageous employment. Instead of increasing the exchange value of its annual output, as the lawgiver intends, every such regulation necessarily diminishes it.

Such regulations may, it is true, sometimes enable a particular manufacture to take root earlier than it otherwise would and, after a time, to produce goods at home as cheaply as, or more cheaply than, a foreign country. But even if society's industry can thus be channeled into a particular use advantageously sooner than it otherwise might, it does not follow that such a regulation can ever increase the sum total of its industry or revenue. Society's industry grows only as its capital grows, and capital grows only through what can gradually be saved from revenue. Yet every such regulation immediately reduces revenue; what reduces revenue is hardly likely to increase capital faster than capital would have grown on its own had both capital and industry been free to find their natural employments.

Even if, without such regulations, society never acquired the proposed manufacture, it would not necessarily be poorer at any point in its history. At every point, its entire capital and industry might still have been employed in different pursuits that were the most advantageous at the time. At every point, its revenue might have been as high as its capital permitted, while both capital and revenue might have grown as rapidly as possible.

The natural advantages one country possesses over another in producing particular goods are sometimes so great that everyone acknowledges the futility of competing with them. Glasshouses, hotbeds, and heated walls can produce very good grapes in Scotland, and very good wine from those grapes, at about thirty times the cost of importing wine at least as good. Would it be reasonable to prohibit all foreign wine simply to encourage the making of claret and Burgundy in Scotland? If it would be plainly absurd to devote thirty times as much national capital and industry to such production as would be needed to buy the same quantity of the desired goods abroad, it must also be absurd—though less obviously so—to devote even a thirtieth or a three hundredth part more. It makes no difference here whether one country's advantages over another are natural or acquired. So long as one has advantages the other lacks, it will always be better for the latter to buy from the former than to make the goods itself. The advantage one craftsman has over a neighbor who follows another trade is only an acquired one; still, both find it better to buy from each other than to make goods outside their respective trades.

On Restrictions on Imports from Foreign Countries of Goods That Can Be Produced at Home

High duties or outright bans on imports that can be produced at home give domestic producers some or all of the home market to themselves. For example, the ban on importing live cattle and salted meat gives Great Britain's graziers a monopoly on meat sold at home. High duties on imported corn have the same effect for corn growers: when the harvest is moderately plentiful, those duties amount to a ban. The ban on imported foreign woolen goods similarly benefits woolen manufacturers. Silk manufacturers have recently gained the same advantage, although all their raw materials come from abroad. Linen manufacturers have not gained it yet, but are making great strides toward it. Many other British industries have likewise obtained a full or nearly full monopoly against their fellow citizens. Anyone unfamiliar with customs laws would hardly guess how many kinds of goods are barred from entry into Great Britain, either entirely or under certain conditions.

Such a monopoly of the home market often strongly encourages the industry that receives it. It also often draws more of society's labor and stock into that industry than would otherwise go there. That much is beyond doubt. Whether it increases society's overall industry, or steers it in the most useful direction, is much less clear.

Society's total industry can never exceed what its capital can employ. The number of workers any one person can keep employed has a certain relationship to his capital. Likewise, the number all the members of a large society can keep employed has a certain relationship to society's total capital, and cannot exceed it. No trade regulation can raise the amount of work in a society above what its capital can support. It can only shift some of that work into a line it might not otherwise have entered. There is no reason to assume that this artificial choice is better for society than the choice it would have made on its own.

Each person continually tries to find the most profitable use for the capital he controls. He has his own benefit in mind, not society's. But pursuing his own benefit naturally, indeed necessarily, leads him to prefer a use that is most beneficial to society.

First, each person tries to use his capital as close to home as possible, and thus to support domestic industry as much as possible, so long as he can earn the ordinary profit on stock, or not much less.

For example, when profits are equal or almost equal, a wholesale merchant naturally prefers domestic trade to foreign trade supplying goods for home consumption, and prefers that foreign trade to carrying goods between foreign countries. In domestic trade his capital is never out of his sight as long as it often is in foreign trade. He knows more about the people he extends credit to and their circumstances. If they deceive him, he knows more about the laws under which he can seek compensation. In the carrying trade, by contrast, his capital is split between two foreign countries. None of it has to come home or remain within his direct supervision and control. An Amsterdam merchant carrying corn from Koningsberg to Lisbon and fruit and wine from Lisbon to Koningsberg generally has half his capital in Koningsberg and half in Lisbon. None need ever reach Amsterdam. Such a merchant would naturally live in Koningsberg or Lisbon; only unusual circumstances could make him choose Amsterdam instead. Yet the discomfort of being so far from his capital usually makes him bring some of the Koningsberg goods meant for Lisbon, and some of the Lisbon goods meant for Koningsberg, through Amsterdam. This involves loading and unloading twice and paying some extra duties and customs charges. He willingly bears those costs so that some capital is always within his sight and control. This is how every country with a substantial carrying trade becomes an emporium, a common marketplace for the goods of all the countries whose trade it carries. To avoid the second loading and unloading, the merchant tries to sell at home as many of those foreign goods as possible. As far as he can, he turns his carrying trade into foreign trade supplying domestic consumers. Likewise, a merchant collecting goods to export to foreign consumers is glad to sell as much as possible at home if the profits are equal or nearly equal. He avoids the risk and trouble of export by turning that part of his foreign trade into domestic trade. Home is thus the center around which a country's capital is always circulating and toward which it tends, even if particular causes sometimes push it into more distant uses. As already shown, an equal amount of capital employed in domestic trade sets more domestic industry in motion, and provides income and jobs for more local people, than capital employed in foreign trade supplying domestic consumers. That foreign trade has the same advantage over carrying trade. So, where profits are equal or nearly equal, people naturally use their capital in the way most likely to support domestic industry and provide income and work to the greatest number of their fellow citizens.

Second, anyone who uses capital to support domestic industry necessarily tries to direct it toward producing goods of the greatest possible value.

The output of an industry is the value it adds to the materials it works on. The employer's profits rise or fall with the value of that output. Profit is the only reason anyone invests capital in an industry. He will therefore always try to support the industry whose output is likely to have the greatest value, or can be exchanged for the most money or other goods.

But society's yearly revenue is exactly equal to the exchangeable value of its industry's total yearly output; indeed, the two are the same thing. Each person tries both to use capital in support of domestic industry and to direct that industry toward the most valuable output. Each therefore works to make society's yearly revenue as large as possible. Usually, he neither intends to serve the public interest nor knows how much he is serving it. He supports domestic rather than foreign industry only to protect himself. He directs industry toward the most valuable output only for his own gain. In this and many other cases, an invisible hand leads him to serve an end he never meant to serve. Society is not necessarily worse off because he did not intend it. By pursuing his own interest, he often serves society's interests better than when he actually sets out to do so. I have never seen much good come from people who pretend to trade for the public good. That pretense is not common among merchants, and little needs to be said to discourage it.

A person in his own location can clearly judge much better than a statesman or lawmaker which domestic industry he should invest in and which will produce the most valuable goods. A statesman who tried to tell private people how to use their capital would take on a needless burden. He would also claim a power that cannot safely be entrusted to any one person, or even to any council or senate. That power would be most dangerous in the hands of someone foolish and arrogant enough to think himself fit to exercise it.

Giving the domestic output of a particular craft or industry a monopoly on the home market amounts to directing how private people use their capital. In almost every case, this rule must be either pointless or harmful. If domestic producers can supply the goods as cheaply as foreign producers, the rule is plainly pointless. If they cannot, it is generally harmful. A sensible household head never tries to make something at home if making it costs more than buying it. A tailor buys shoes from a shoemaker rather than making his own. A shoemaker hires a tailor instead of making his own clothes. A farmer makes neither shoes nor clothes, but employs those skilled workers. All find it best to devote their work to what they do better than their neighbors. They use part of their output, or the money they receive for it, to buy whatever else they need.

What is sensible for each household can hardly be foolish for a large kingdom. If a foreign country can supply a good more cheaply than we can make it, we should buy it with part of the output of an industry in which we have an advantage. This does not reduce the country's total industry, which always depends on the capital employing it, any more than buying from one another reduces those workers' industry. It simply lets that industry find its most advantageous use. It is certainly not put to its best use when it is forced to make something it could buy for less. Its yearly output loses some value when labor and capital are turned away from goods worth more than the ones they are made to produce. By assumption, the latter goods cost less to buy abroad than to make at home. They could therefore be bought with only part of the goods, or part of the proceeds from those goods, that the same capital would have produced at home if allowed to follow its natural course. Thus the country's industry moves from a more profitable to a less profitable use. Instead of increasing the exchangeable value of its yearly output as the lawmaker intends, each such rule must reduce it.

These rules may indeed sometimes allow a particular manufacturing industry to develop sooner than it otherwise would. After a time, it might make its goods at home as cheaply as, or more cheaply than, foreign producers. But even if society's industry can be steered early into a particular line with good results in that line, it does not follow that a rule can ever increase society's total industry or revenue. Industry grows only as capital grows, and capital grows only as people gradually save from their revenue. The immediate effect of any such rule is to reduce revenue. Reducing revenue is certainly unlikely to make capital grow faster than it would if capital and industry had been free to find their own uses.

Even if, without these rules, society never developed the proposed manufacturing industry, it would not necessarily be poorer at any point. Its entire capital and labor could still have been used elsewhere in the most advantageous way available at the time. In every period its revenue could have been as large as its capital allowed, and both revenue and capital could have grown as quickly as possible.

Sometimes one country has such great natural advantages in making particular goods that everyone agrees it is pointless to compete. Scotland can grow very good grapes in greenhouses, hotbeds, and against heated walls, and make very good wine from them. But doing so costs about thirty times as much as importing wine at least as good. Would it make sense to ban all foreign wine just to encourage Scottish claret and Burgundy? It is plainly absurd to devote thirty times as much national capital and labor to making goods as it would take to buy the same amount abroad. Devoting a thirtieth or even a three hundredth part more is absurd in exactly the same way, if less obviously. It makes no difference here whether one country's advantage is natural or acquired. As long as one country has an advantage the other lacks, the latter will do better to buy from the former than to make the goods itself. One worker's advantage over a neighbor in a different trade is acquired, not natural. Yet both do better buying from each other than trying to make goods outside their own trades.