The Wealth of Nations by Adam Smith (WN hereafter) builds a brand new understanding of economics. He writes about the condition of the economy during the time he wrote his book. He talks about his views against the trading system and gives an account of an economic system based on human nature, need, and social dynamics. In this text, Smith separates his findings into 5 different chapters or ‘books’ as he calls them. Book one and two both focus on the development of the division of labor and telling his readers about how the division adds to the wealth and money gain by different societies by gaining extra materials and found ways to exchange in trades with the people involved in the society. The division of labor also influences technological inventions and improvements. This allows workers to come up with different ways to make tasks more efficient and find ways to divide the materials among the people. According to Smith, Surpluses may be either traded or re-invented. (WN 1, iii, Page 12) Technology is the future and by being the future it allows improvement that leads to bigger and better products.
However, in John Stewart Mill’s book, Principles of Political Economy with Chapters on Socialism (PPE hereafter), he studies the important economic processes on societies that include production and distribution and also the role the government plays in it. Just like Smith’s book, Mill has his book also spilt and separated into five different sections. In his book one, Mill talks about the production and informs the reader of the basic requirements that allow production; which in this case is labor and natural objects. Also in this book, Mill talks about the social form of productions that include the cooperation, combination of labor, production on a small and large scale and the increase in labor. However in his book two, Mill talks about the distribution of those products and how they effect the distribution on certain elements and the things that play a role in society. According to both Smith and Mills, the importance of foreign trade for the economic growth of a nation is the way a product is produced and the way they are distributed throughout a society.
According to Smith and Mill, some ways that foreign trade can benefit the goal of increasing annual production is that the economy is based off supply and demand. Smith’s beliefs on the division of labor create the basis for his theory of international trade. For Smith, international trade is the result of the human ‘propensity to truck, barter, and exchange one thing for another’ (WN, I, ii, page 1) and for him, it is the division of labor that indicates ‘the greatest improvement in the productive powers of labor’ (WN, I, I, page 1). As a result, more output can be produced with the same amount of labor. He explains this point with an example, which shows that the division of labor produces an ‘increase of the quantity of work which’the same number of people are capable of performing’ (WN, I.i.5). Then he talks about three reasons for this development. First, ‘the increase of dexterity in every particular workman; second, ‘the saving of the time which is commonly lost in passing from one species of work to another’; and thirdly, ‘the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many’ (WN, I, i, page 5). The division of labor leads to the quantitative and qualitative production that allows for improvements. This means that output is increasing, technological development is encouraged, and workers’ skills and productivity are better. As a result, economic growth is supported and national wealth is increased. The only limitation on the division of labor is ‘the power of exchanging’, or in other terms, ‘the extent of the market’ (WN, I, iii, page 1). Therefore, if the market is growing, an increase in the division of labor will be possible and, as a result, economic growth and wealth will expand. According to Smith, this is a reason that international trade should to be highly considered.
Mill thinks that a society will continue to grow and change, but he knows that that change is limited by the abilities and skills of the land and of labor. Both have to be controlled and handled with care and caution since neither can continue to produce an increasing amount in order to satisfy a growing demand.
According to Smith, international trade is advantageous for nations because
it ‘gives a value to their superfluities, by exchanging them for something else, which may satisfy a part of their wants, and increase their enjoyments. By opening a more extensive market’ it encourages them to improve its productive powers, and to augment its annual produce to the utmost, and thereby to increase the real revenue and wealth of the society. ‘ (WN, IV, I, page 31) Smith ties international trade to his ideas of the division of labor. If trade with another nation is started, an expansion of the division of labor will be likely because the international market is bigger than only the domestic market. International trade is beneficial to a nation because the improved division of labour leads to an increase of the value of the product that came from both the land and the labor. This means that the real wealth of the nation and its population and the demand for the product increase.
The advantages from international trade are covered by the increased struggle that domestic producers are faced with. This is another advantage, because international trade decreases the likelihood of domestic monopolies. Smith discusses that free competition, though often not in the interest of the producers, is always beneficial to the public. Smith also states an additional reason for international trade, that it transfers knowledge and technology between different nations and societies. The gain and use of new production methods lead to productivity growth, economic development, and an increase in money. Smith points out that these improvements can even be more important to a nation than access to a wider market. Overall, international trade is beneficial to both the individual nations and the world as a whole.
A nation specializes in the production of some goods while buying other goods from abroad. This is beneficial to a nation because ‘If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage’ (WN, IV, ii, page 12). This means that a nation produces and distributes those commodities cheaper than other nations, and imports the products that cannot be produced. A nation will not produce a product that is produced more expensively at home than overseas. International trade develops in the same way as domestic trade. If free trade is effective, consumers will buy a good from whoever sells it at the lowest price. The producer or nation with the lowest production costs is able to sell it cheaper than every other producer and is able to make their product cheaper than the competitors they face. Every nation will produce those commodities more and be able to sell them at a lower price because there is more of a supply and a need for those items. More people will make an effort to continue and purchase the product being produced. Meaning there will be more people making the product to be able to keep and meet the demand for each one of them.
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