JOURNAL OF GLOBAL TRADE, ETHICS AND LAW

Volume 3 Issue 2, 2025

WAR, TRADE, AND MERCANTILISM:

RECONCILING ADAM SMITH'S THREE THEORIES OF

THE BRITISH EMPIRE

Barry R. Weingast1*

1 Department of Political Science, Stanford University, California, United States, weingast@stanford.edu.

*Corresponding Author

Abstract. Adam Smith proposed two contradictory theories of the British

Empire in the Wealth of Nations and suggested a third. The first view holds

that the empire was created for merchants eager to establish and maintain

monopolies of the colonial trade. Smith concludes that “Great Britain derives

nothing but loss” from the colonies. In the second view, Smith celebrates the

European discovery of the new world, opening non-incremental increases the

division of labour, specialization and exchange. The empire thus fostered the

economic growth of both sides of the British Atlantic, net of the costs of

monopoly. Smith’s third argument holds that many mercantile restrictions

improved Britain’s security given its long-term military competition with

France. How do we reconcile the incompatibility of Smith’s three views of

the British Empire? Smith provides no guidance. I argue that, to understand

the British Empire, we must view it from the perspective of a long-term

military rivalry with France. Many navigation regulations were designed to

advantage Britain vis-a-vis France. Smith argues, for example, that the harm

to France from prohibiting trade in military stores more than compensates the

loss in wealth due to the restrictions. I demonstrate the logic of these claims

using tools from modern political economics and political science.

Keywords: Adam Smith, Political Economics, Empire,

War and Military Competition, Great Britain vs France, Wars; 1689-1715.

JEL: B10, F10, F20

Journal of Global Trade, Ethics and Law

ISSN 2977-0025 (Online). Published under Creative Common (CC) BY 4.0 license.

https://doi.org/10.70150/97710e06

Durham &

Thunmann

Barry R. Weingast, 2025

As defence…is of much more importance than opulence, the act of navigation is, perhaps,

the wisest of all the commercial regulations of England (WN IV.ii.30, 464-65).

"Is [the Wealth of Nations] a defence of empire or repudiation of it? By a supreme

artistry [Adam Smith] goes along with two contrasting points of view and leaves us

balanced on razor's edge, till in the last word of the last sentence" (C.R. Fay 1956, 107).

1. Introduction

How are we to understand Adam Smith’s multiple views about free trade, the value to

Great Britain of her empire, and mercantilism? Most Smith scholars, especially

economists, consider this question closed. These scholars view him as an unqualified

champion of free trade, opposed to mercantile policies designed to create an empire

largely to enhance merchant profits. Yet, Smith’s views on the issues of trade,

mercantilism, and empire are not so straightforward (as Palen 2014 suggests). I will show

that the difficulty arises because Smith proposed three distinct and somewhat

contradictory theories of the British Empire in the Wealth of Nations.

These multiple

views force us to qualify Adam Smith’s support of free trade, including the ways in which

his approach pushes beyond the domain of modern economic theories of international

trade.

Smith’s first view reflects the dominant view in the literature just noted. In this account,

Smith argued that the empire was based on rent-seeking by merchants eager to establish

and maintain monopolies on the colonial trade, providing few benefits to Great Britain

(WN IV.vii.c.64-65, 614-15). Great Britain would be much better off abandoning the

American colonies than paying for the colonies’ expensive defence. Most scholars follow

this portion of Smith's emphasis; and he places the most emphasis and relies on the

strongest and often polemic rhetoric in espousing this view.

In the second view, Smith celebrates the empire as affording a non-incremental increase

in the extent of the market, in turn creating a non-incremental increase in the division of

labour, specialization and exchange. The greater division of labour promoted the

economic growth of both sides of the British Atlantic. In Smith’s words, “the discovery

of America, and that of a passage to the East Indies by the Cape of Good Hope, are the

Note: Abbreviations of Smith's work are placed just before the references.

Adam Smith is known for “inconsistencies” on numerous topics in his corpus. As Sowell (1979:11)

puts it, Smith “was little concerned with elegance, fine points, or with appearances of consistency… he was

consistent in his use of terms throughout any given chain of reasoning, so that his conclusions were

unaffected by his inconsistent use of terms between one set of reasoning and another.” See also Coats

(1975:218), Evensky (2005, 22-23; n42), and Viner (1927:221).

For example, see Evensky (2015, chapter 4), Koebner (1961, 219-35), Stevens (1985, 211), Van de

Haar (2013), and Winch (1996). Ekelund and Tollison (1997, especially chapter 1 & 3) take a more nuanced

and political view based on the idea of “rent-seeking” in an institutional setting.

Barry R. Weingast, 2025

two greatest and most important events recorded in the history of mankind... By uniting,

in some measure, the most distant parts of the world, by enabling them to relieve one

another's wants, to increase one another's enjoyments, and to encourage one another's

industry, their general tendency would seem to be beneficial” (WN IV.vii.c.80, 626). In

this view, 18th century Britain was far richer and more industrialized because of the larger

market and greater division of labour afforded by the colonies (Winch 1965, 9-11).

the division of labour is the hallmark of Smith's theory of economic growth, adherents of

Smith’s first view cannot simply ignore or push this aspect of Smith’s views aside.

Smith makes a third argument concerning the military value of the empire to the

metropole. Instead of presuming a world largely characterized by international peace, as

implicit in in modern international trade theory, Smith assumes a world of violent,

international competition and conflict. In this violent world, many mercantile restrictions

serve a valuable purpose, namely, improving Britain’s security. Hont (2005, 2015), long-

time student of Adam Smith, argues that “the phrase ‘jealousy of trade’ refers to a

particular conjunction between politics and the economy. It emerged when success in

international trade became a matter of the military and political survival of

nations.’” Further this survival required that “the logic of trade was bent to the logic of

war” (Hont 2005, 5-6 emphasis added). By this, Hont meant that countries had to adjust

trade policy to reflect whether the countries are at war. This approach is the least well-

known of the three, and Smith gives it the least attention; further, he scattered this material

across the Wealth of Nations rather than being developed all at once (see WN IV.ii.29-30,

464-65).

Nonetheless, the cumulative weight of his many observations from this

perspective adds up to a significant argument.

To give some credence to my contention that Smith presented three distinct sets of

logics, I offer the following three quotations that represent Smith’s different views. With

respect to the first and view, Smith says,

“[The] maintenance of this monopoly [of the colonial trade] has hitherto been the

principal, or more properly perhaps the sole end and purpose of the dominion which

Great Britain assumes over her colonies... Under the present system of management,

therefore, Great Britain derives nothing but loss from [this] dominion” (WN IV.vii.c.64-

65, 614-15).

With respect to the second view, Smith says,

“The natural good effects of the colony trade, however, more than counterbalance to

Great Britain the bad effects of the monopoly, so that, monopoly and all together, that

trade, even as it is carried on at present, is not only advantageous, but greatly

advantageous. The new market and the new employment which are opened by the colony

trade, are of much greater extent than that portion of the old market and of the old

employment which is lost by the monopoly... If the colony trade, however, even as it is

Smith bitterly denigrates the European treatment of the native populations (for example, WN

IV.i.32:448 and IV.vii.c.80, 626).

Nonetheless, this third view has a range of adherents in the Smith literature, including Hont (2005),

Samuels (1973), and Viner (1948). Grampp (1965, 40), for example, observes that “Smith ... wrote in favor

of the Navigation Acts and other measures which increased the national power of Britain but diminished

its real income.” Hirschman (1945) provides a more general treatment of the effect of war on trade.

Barry R. Weingast, 2025

carried on at present is advantageous to Great Britain, it is not by means of the monopoly,

but in spite of the monopoly” (WN IV.iii.c.50, 608-09).

Finally, with respect to British mercantile restrictions that he elsewhere bitterly

criticizes, Smith make the assertion noted in the first headnote:

“As defence, however, is of much more importance than opulence, the act of navigation

is, perhaps, the wisest of all the commercial regulations of England” (WN IV.ii.29-30,

464-65).

How do we reconcile the incompatibility of Smith’s three views of the British Empire?

And how do we make sense of British behaviour, both in its mercantile policies and its

sustained, 125-year military rivalry with France?

I argue that, to understand the British Empire, we must work backwards through the

three views. Economists largely ignore the problem of war and how it affects the

desirability of various trade policies, although this has begun to change after many

Americans have begun to worry about our dependence on potential adversaries. The

inattention to war may be reasonable when studying eras of sustained international peace

and global trade. But it fails in fundamental ways to help us understand behaviour and

policymaking in an era of sustained military rivalry. The British Empire arose and

prospered in just such an era; namely, Britain’s sustained, multi-generational military

rivalry with France from 1689 until 1815 (Findlay and O’Rourke 2007, 247). This era of

sustained military competition contrasts with the economists’ world international trade

theory which implicitly assumes sustained peace in which countries maximize absolute

gains. Consider a major trade agreement between two countries that grants one party five

times the amount gained by the second. In Smith's first view, because the agreement

makes both better off, it is desirable.

In contrast, international relations theorists demonstrate that a world of sustained

military rivalry is more like a zero-sum game than in contrast to an era of free trade and

international peace.

Using a variant of a standard bargaining model, Powell (1991)

demonstrates that countries engaged in sustained military rivalries will maximize their

relative gains. Because the probability of winning wars is a positive function of resources,

a major trade agreement between two military rivals that grants one side five times the

gain of a rival adversely alters the expected value of fighting in favour of the first country.

Further, this perspective implies that policies that are negative sum but which harm

country one’s rival substantially more than it harms itself can be of great advantage. As I

discuss below – in contrast to his arguments favouring free trade – Smith applauded

Britain’s navigation policies because these restrictions on trade enhanced Britain’s

military capacity.

The second view complements the third. The American colonies greatly expanded the

division of labour in the Empire. The larger British economy, and hence British wealth,

made Britain a more powerful military opponent, ultimately bankrupting France, leading

to the French Revolution. Similarly, policies, such as the Navigation act, denying trade

I draw on Fearon (1995) and Powell’s (1991) foundational papers in international security; see also

Morrow. Siverson, and Tabares (1998); Ferguson (2003, 20-21); and, and Hont (1988, 6) who emphasize

the zero-sum nature of economic competition in the era of sustained military rivalry.

Barry R. Weingast, 2025

with France in goods of great military value, aided Britain because they diminished

France’s military capacity (Logan 2005, 207-08).

Finally, to understand the first view, I suggest that we distinguish between a strong

form and a weak form of the free-trade argument. The strong form asserts that the empire

was solely for the benefit of merchants; the weak form, that merchants gained valuable

privileges and rents due to Britain’s protectionism, but they were not the sole or even the

most important reason for empire. Rent-seeking was an inevitable feature of British

political economy given the immense size of expenditures on war. In the Seven Years'

War (1756-63) with France, Britain spent around £100 million, on the order of estimated

GDP.

Smith’s second and third arguments directly contradict his statements that

benefitting merchants was the sole goal and effect of the British Empire. For example,

Smith emphasizes the monopoly aspects of British navigation acts, such as restrictions on

foreign ships carrying trade to and from the Empire (WN II.v.30, 370-71), yet in other

places he notes the obvious military advantage of these policies – they increase the

number of seamen and the size of the British fleet in times of war (WN IV.ii.30, 464-65).

My purpose in this paper is to make sense of these seemingly contradictory perspectives

by emphasizing that Smith’s second and third approaches are complementary and

sensible arguments based on a sustained military threat. As to the first view, I accept its

weak form while rejecting its strong form because the latter ignores the problem of

sustained violent conflict. As I quote Smith in the headnote and other passages below,

war sometimes trumps free trade.

This paper proceeds as follows. The next three sections discuss Smith's three views of

empire: arguments about the costs of the empire and the influence of merchants in

maintaining it (section 2); Smith’s discussion of the benefits of empire (section 3); I then

discuss Smith's third approach, drawing on models from international relations theory in

political science that emphasize the logic of war (section 4). In section 5, I propose a

reconciliation of Smith’s three views, while section 6 develops the implications of this

reconciliation. My conclusions follow.

2. Evaluating the Net Value of the Colonies and Empire to the

British: The Cost Side of the Ledger

Smith’s advocacy of free trade is among the most well-known arguments from the

Wealth of Nations. In this context, scholars have extensively studied Smith’s views on

mercantilism and the British Empire.

Smith’s first and most elaborate explanation for

the empire focuses on rent-creation for merchants, producing private benefits at the

collective expense. Emphasizing the costs of the empire, the literature largely

On estimates of GDP, see Broadberry, Campbell, et al. (2015); and for public expenditures on war, see

Mitchell (1988, Table “Public Finance 2,” 578-80).

See, e.g., Benians (1925), Evensky (2015, chapter 4); Hont (2005, 2015 chapter 6), Kennedy (2010,

chapter 11), Magnussen (2007), Palen (2014), Phillipson (2010, chapter 1), Skinner (1996, 2009), Tribe

(2006), Van de Haar (2013), and Winch (1965).

Barry R. Weingast, 2025

characterizes Smith’s approach to the British mercantile system as abidingly negative.

Smith’s emphasis in the Wealth of Nations fosters this conclusion, including his long,

emphatic, and unambiguous closing paragraph. Indeed, Smith’s final sentence reads, “If

any of the provinces of the British empire cannot be made to contribute towards the

support of the whole empire, it is surely time that Great Britain should free herself from

the expence of defending those provinces in time of war, and of supporting any part of

their civil or military establishments in time of peace, and endeavour to accommodate

her future views and designs to the real mediocrity of her circumstances” (WN V.iii.92,

946-47).

Smith’s oft-quoted phrase in a 1780 letter to Andreas Holt supports this account; in the

letter, Smith refers to the Wealth of Nations as a “very violent attack I had made upon the

whole commercial system of Great Britain” (Corr, letter 208 at 251).

Evensky (2015,

146) summarizes the view that Britain’s mercantile system did more harm than good: “In

the name of national interest mercantilist policies have artificially drawn capital into the

distant, slower, and less secure colonial trade.”

In addition to the direct benefits and costs of the empire, Smith evaluates the effects of

mercantile regulation, arguing that it is sufficiently costly as to negate the benefits of

empire: “Even the regulations by which each nation endeavours to secure to itself the

exclusive trade of its own colonies, are frequently more hurtful to the countries in favour

of which they are established than to those against which they are established” (WN

IV.vii.c.83-84, 627-28).

Smith mentions numerous times that the American colonies bear no part in the high

expenses of their defence and provide nothing in return to Britain.

In developing this

logic, Smith belittles the indirect benefits of the colonies to Britain. He draws two

conclusions: first, the net benefits of the colonies to Britain are at best zero; and second,

rent-seeking, interest group influence, and monopolization explain why Britain sustains

its costly and burdensome colonies (as Ekelund and Tollison 1981, 1997 argue).

Koebner (1961, 234) aptly labels Smith’s characterization of the monopolies as

“scathing.” Smith proposes the obvious remedy to the wrong-headed mercantile policies:

“the natural system of perfect liberty and justice ought gradually to be restored ... The

adjustment towards this ideal must be incremental so as not to create these ‘greater

disorders’” (WN IV.vii.c.44, 606).

In conclusion, Smith reports that, “A great empire has been established for the sole

purpose of raising up a nation of customers” (WN IV.viii.53-54, 661). Based on the

arguments presented in this section, it appears that Smith has little positive to say about

the empire. As I have observed, the bulk of the secondary literature concurs.

Ekelund and Tollison (1981, 1997) provide one of the most comprehensive analyses of Smith's ideas

and especially British practice from this perspective (see also Evensky 2015, chapter 4).

For example, WN IV.vii.b.35, 579; IV.vii.b.63, 590; IV.vii.c.64, 614-16; IV.vii.c.65, 616; IV.vii.c.11-

12, 593; IV.vii.c.14, 594; and IV.vii.c.2-26, 598-99.

(WN IV.vii.c.64, 614-16). Smith repeats this conclusion elsewhere in WN: "The pretended purpose of

[monopoly privileges] was to encourage the manufactures, and to increase the commerce of Great Britain.

But its real effect has been to raise the rate of mercantile profit" (WN IV.vii.c.64, 616). And: "Under the

present system of management, therefore, Great Britain derives nothing but loss from the dominion which

she assumes over her colonies" (WN IV.vii.c.65, 616).

Barry R. Weingast, 2025

3. Evaluating the Net Value of the Colonies and Empire to the

British: The Benefit Side of the Ledger

In contrast to Smith’s seemingly unambiguous assertions quoted in the previous section

that Britain gained nothing from the American colonies, in numerous discussions in the

Wealth of Nations, Smith provides equally clear assertions that the net benefits afforded

by the colonies were “not only advantageous, but greatly advantageous” (WN IV.iii.c.50,

608-09; see also IV.vii.c.47, 607-08). Smith discusses indirect but substantial sources of

advantage to the metropole. These benefits arise from the great expansion of what he

famously labelled “the extent of the market” and the subsequent increase in the division

of labour, specialization, and exchange. In direct contradiction to his assertions quoted in

section 2, Smith claims more than once that these benefits of empire exceed the costs of

monopolies.

3.1. Indirect Economic Benefits to Great Britain from the Colonies

I have already quoted at length in the introduction Smith’s boldest statement of how

the two sides of the British Atlantic benefit each other by relieving each other's relative

wants. In brief, recall Smith argued that the specialization and exchange, Smith's division

of labour, of the empire resulted in a non-incremental change in British income and wealth

(WN IV.vii.c.80, 626). Trade with America enriches Europe, Great Britain in particular:

“The surplus produce of America, imported into Europe, furnishes the inhabitants of this

great continent with a variety of commodities which they could not otherwise have

possessed, some for conveniency and use, some for pleasure, and some for ornament, and

thereby contributes to increase their enjoyments” (WN IV.vii.c.5, 591).

The division of labour stands as one of Smith’s central elements of economic growth

(WN I.i-iii, 13-26; see also Hollander 1973, 208-10). Smith famously argued that “the

division of labour is limited by the extent of the market” (WN I.iii, 31). Not surprisingly,

when speaking of the benefits of the American colonies from this perspective, Smith

emphasizes how the American colonies afforded a much larger market for British goods

than otherwise. In a section of WN entitled, “Of the Advantages which Europe has derived

from the Discovery of America” (WN IV.iii.c), Smith explains that this source of benefits

of the empire to the metropole arises despite the monopolization of aspects of America’s

trade (as quoted above in the introduction). “The new market and the new employment

which are opened by the colony trade, are of much greater extent than that portion old

market and of the old employment which is lost by the monopoly” (WN IV.iii.c.50, 608-

09).

Smith examines this argument further with respect to empire’s effect on British (and

European) commerce and manufacturing. He argues that the towns of Europe, because of

the American and other colonies, serve a very large part of the world. Without the

Barry R. Weingast, 2025

colonies, the towns were likely to be much smaller, producing a more limited selection

of goods and serving a smaller, adjacent territory:

“the commercial towns of Europe, instead of being the manufacturers and carriers for

but a very small part of the world (that part of Europe which is washed by the Atlantic

ocean, and the countries which lie round the Baltick and Mediterranean seas), have now

become the manufacturers for the numerous and thriving cultivators of America, and the

carriers, and in some respects the manufacturers too, for almost all the different nations

of Asia, Africa, and America. Two new worlds have been opened to their industry, each

of them much greater and more extensive than the old one, and the market of one of them

growing still greater and greater every day.

The countries which possess the colonies of America, and which trade directly to the

East Indies, enjoy, indeed, the whole shew and splendour of this great commerce” (WN

IV.vii.c.80-82, 626-27).

Smith further argues that the growth of commerce and manufacturing indirectly

improves European agriculture by increasing the demand for these products. “It is chiefly

by encouraging the manufactures of Europe, that the colony trade indirectly encourages

its agriculture. The manufacturers of Europe, to whom that trade gives employment,

constitute a new market for the produce of the land; and the most advantageous of all

markets; the home market for the corn and cattle, for the bread and butchers–meat of

Europe; is thus greatly extended by means of the trade to America” (WN IV.iii.c.51ea,

609).

Smith explained that the benefits of the larger market for the goods and produce did

not flow on a one-way street benefitting solely Great Britain. The Atlantic trade also

benefitted the development of the American colonies. America not only prospered, but

grew faster than Great Britain, as Smith and many of his contemporaries recognized (e.g.,

Pownall 1776, Rodriguez Braun 1992). The faster economic growth in America led Smith

famously to predict that the wealth of America would likely surpass that of Britain in a

century: “Such has hitherto been the rapid progress of that country in wealth, population

and improvement, that in the course of little more than a century, perhaps, the produce of

American might exceed that of British taxation” (WN IV.vii.c.79, 625).

In short, Smith’s

discussion of the gains from exchange emphasizes that the empire was a positive-sum

game for both sides of the Atlantic.

Further, “Other countries, however, notwithstanding all the invidious restraints by which it is meant

to exclude them, frequently enjoy a greater share of the real benefit of it. The colonies of Spain and Portugal,

for example, give more real encouragement to the industry of other countries than to that of Spain and

Portugal” (WN IV.vii.c.82, 627).

Ronald Coase seems to relish this observation in the context of Smith’s proposal for a fiscal union as

the solution to the “conflict with America” in which America would gain representation in Parliament; and

Parliamentary representation of Britain and the American Colonies would depend on their relative tax

contributions. Coase (1977, 323-25) explains the implications. If Smith's proposal of granting colonies

representation in the British parliament proportional to their contributions to public revenues had been

implemented before the outbreak of hostilities, "there would have been no 1776, ... America would now be

ruling England, and we [in America] would be today celebrating Adam Smith not simply as the author of

the Wealth of Nations, but hailing him as a founding father."

Barry R. Weingast, 2025

4. Smith’s Third View: The Security Benefits of Empire

Smith suggested a third way to understand the value of Empire to Britain. This view

builds on Smith’s second view. It also contradicts Smith’s first view, which fails to

account for sustained military competition, an omnipresent feature of the early modern

European environment. I advance this third view as the foundation for understanding

Smith’s views of the British Empire. In a surprisingly large number of passages in the

Wealth of Nations, Smith argued that the colonies provided valuable military benefits to

the empire, wholly apart from the colonies’ provision of tax revenue or soldiers to help

finance their defence. His discussions of this topic are not gathered into one sustained

argument, in contrast to his argument about the benefits derived from the increasing size

of the market. Moreover, unlike the trenchant, even polemical, rhetoric Smith employed

about the costs of the empire, his rhetoric about the security benefits is more measured.

Nonetheless, a coherent argument emerges when we draw together Smith’s discussions

on this topic.

Smith articulates the general principle underlying many specific instances in the third

of three quote in the first headnote: the trade restrictions embodied in the navigation acts

were valuable because defence trumps opulence in trade policy (WN IV.ii.29-30, 464-65;

see also Grampp 1965, 40; Hont 1988, 6; 2005; and Samuels 1973). Trade regulations

that improve security may be beneficial to Great Britain even if they reduce wealth. In

Smith’s words:

“If any particular manufacture was necessary, indeed, for the defence of the society, it

might not always be prudent to depend upon our neighbours for the supply; and if such

manufacture could not otherwise be supported at home, it might not be unreasonable that

all the other branches of industry should be taxed in order to support it. The bounties

upon the exportation of British-made sailcloth, and British-made gunpowder, may,

perhaps, both be vindicated upon this principle” (WN IV.v.a.36, 522-23; see also

IV.ii.23-24, 563).

This logic of security has important adherents in the literature. National security with

respect to material of strategic value requires independence of foreign rivals who could

withhold them. This is known as the “hold-up problem” in economics (Klein, Crawford,

and Alchian 1979; Williamson 1985) in which one party has far more bargaining leverage

over a second because it (the first party) can threaten to withhold valuable goods or

services that the second can do without only at great expense. Smith illustrates this point

with the example of tar and pitch which England had formerly obtained from Sweden. In

1703, the Swedish firm producing this important naval material withdrew it, limiting

supplies to Britain and forcing her to transport the material in Swedish ships.

Viner

“[A]bout the beginning of the present century, in 1703, the pitch and tar company of Sweden

endeavoured to raise the price of their commodities to Great Britain, by prohibiting their exportation, except

in their own ships, at their own price, and in such quantities as they thought proper. In order to counteract

this notable piece of mercantile policy, and to render herself as much as possible independent, not only of

Sweden, but of all the other northern powers, Great Britain gave a bounty upon the importation of naval

Barry R. Weingast, 2025

(1948, 282) elaborates: “In the seventeenth and eighteenth centuries, colonial and other

overseas markets, the fisheries, the carrying trade, the slave trade, and open trade routes

over the high seas, were all regarded, and rightly, as important sources of national

wealth, but were available, or at least assuredly available, only to countries with the

ability to acquire or retain them by means of the possession and readiness to use military

strength.”

Military power is a function of the ability to mobilize resources useful in war.

Modern students of international relations define it as the probability a country will

triumph over a military rivalry (see Fearon 1995, Hirschman 1945, and Powell 1991).

Powell (1991) demonstrates that, in the presence of – sustained military conflict, states

rationally maximize relative, not absolute power.

Power relative to other countries in early modern Europe depended in large part on

their military and financial capacities. Given the danger of war, national welfare depended

not only on the capital accumulation, the division of labour, and the size of the market,

but a nation’s power relative to potential enemies. Hont (2005, 15) explains how, under

these circumstances, trade policy necessary became an instrument of security. States had

no choice; the “aggressive acquisition of wealth was a mode of national self-

preservation.” Indeed it became an arms race. If one country failed to develop sufficient

military and financial resources, its competitors would gain an edge. In the context of a

sustained military rivalry, “national self-preservation depended on military strength”

(Hont 2005, 15).

Applying this logic, many of Britain’s trade restrictions become more comprehensible.

Smith observes that there seems to be cases in which “it will generally be advantageous

to lay some burden upon foreign, for the encouragement of domestic industry” (WN

IV.ii.23-24, 463). Consider a setting in which:

“some particular sort of industry is necessary for the defence of the country. The

defence of Great Britain, for example, depends very much upon the number of its sailors

and shipping. The act of navigation, therefore, very properly endeavours to give the

sailors and shipping of Great Britain the monopoly of the trade of their own country, in

some cases, by absolute prohibitions, and in others by heavy burdens upon the shipping

of foreign countries” (WN IV.ii.23-24, 463).

Smith explained that deviations from free trade are valuable when their contribution to

security more than counterbalances the losses in trade (Hont 2005, Powell 1991, Samuels

1973, and Viner 1948; see also WN IV.v.a.27, 518). Smith employs a similar argument to

rationalize subsidies to the carrying trade (WN II.v.30, 371). Multiple forms of subsidies

to shipping were valuable, in this view, because they enhanced Britain’s naval capacity,

in turn, enhancing British security and wealth.

stores from America, and the effect of this bounty was to raise the price of timber in America, much more

than the confinement to the home market could lower it; and as both regulations were enacted at the same

time, their joint effect was rather to encourage than to discourage the clearing of land in America” (WN

IV.vii.b.36, 580).

Smith argues that fostering a larger fishing fleet produces a larger pool of sailors in the event of war.

"To increase the shipping and naval power of Great Britain, by the extension of the fisheries of our colonies,

is an object which the legislature seems to have had almost constantly in view. Those fisheries, upon this

account, have had all the encouragement which freedom can give them, and they have flourished

accordingly" (WN IV.vii.b.30, 577-78).

Barry R. Weingast, 2025

Turning to the comprehensive regulatory statutes governing trade in the empire, Smith

explains that, because they contribute to British security, the acts of navigation are value

to Britain. Speaking of Restoration England (1660-88), Smith declares that the navigation

acts, “are as wise ... as if they had all been dictated by the most deliberate wisdom.

National animosity at that time aimed at the very same object which the most deliberate

wisdom would have recommended, the diminution of the naval power of Holland, the only

naval power which could endanger the security of England” (WN IV.ii.29, 464).

Magnusson (2007, 56) reports that Thomas Mun, a mid-17th century mercantilist, argued

that England at this time was “more or less constantly” at war with the Dutch, in which

the Dutch naval superiority was able to drive away the British from valuable trading

opportunities.

Smith characterizes the navigation acts at length:

“The act of navigation, it is true, lays no burden upon foreign ships that come to export

the produce of British industry. Even the antient aliens duty, which used to be paid upon

all goods exported as well as imported, has, by several subsequent acts, been taken off

from the greater part of the articles of exportation. But if foreigners, either by

prohibitions or high duties, are hindered from coming to sell, they cannot always afford

to come to buy; because coming without a cargo, they must lose the freight from their

own country to Great Britain. By diminishing the number of sellers, therefore, we

necessarily diminish that of buyers, and are thus likely not only to buy foreign goods

dearer, but to sell our own cheaper, than if there was a more perfect freedom of trade. As

defence, however, is of much more importance than opulence, the act of navigation is,

perhaps, the wisest of all the commercial regulations of England” (WN IV.ii.29-30, 464-

65).

5. Reconciling Smith’s Three Views:

An Alternative Account of Mercantilism: The Industrial

Organization of Sustained Military Rivals among Early Modern

European Empires

To understand the logic of Smith’s third view, I make explicit a counterfactual implicit

in Smith’s first argument and duplicated in the literature. Suppose Britain had voluntarily

abandoned the American colonies, believing that it would be spared the exorbitant

expense of the colonies' defence. Smith’s first view implies that doing so would be hugely

The Glasgow edition editors of WN – Campbell, Skinner, and Todd – read this passage similarly.

They say with reference to this passage: In WN IV.ii.24,30, the “Navigation Acts are defended on the

ground that defense is of more importance than opulence” (n26, WN II.v.30, 371). Hont (2015, 125) also

agrees: “The right alternative was a sensible foreign policy, here meaning the preservation of Britain a blue-

water power secured by the Navigation Acts (which Smith thought were measures of real republican genius

and had been England's salvation) in conjunction with non-intervention in foreign land wars, while still

acing as an offshore adjudicator of Europe's balance of power.”

Barry R. Weingast, 2025

beneficial to Britain. But is this assertion plausible? If we rely on modern trade theory,

the answer is yes.

Neither Smith, when emphasizing the first thesis, nor the participants in the literature

who advocate Smith’s first interpretation of Smith on the British Empire, appears to have

thought through the counterfactual they have implicitly proposed. The counterfactual

involves multiple hidden presumptions of questionable merit: (i) Britain would save the

huge costs of defence, which America would then have to finance alone; and (ii) trade

between the colonies and Britain would not change drastically. In particular, the newly

independent Americans would continue their extensive trade with Britain.

This implicit counterfactual is an obvious one. Yet, because it misses the margin of

violence, it is inadequate. Optimal trade policy depends on whether the international

environment is one of peace and global trade or of war, military rivalry, and trade

restrictions on empire. As additional evidence to support my thesis, Smith advocated

giving French Canada back to France and Florida back to Spain so that the Americans

would feel surrounded and hence bound to ally and continue trade with Great Britain

(Smith 1778, 382-83). In a world of free trade advocating giving up Florida and Canada

to manipulate America would be unnecessary and irrelevant to American and British

trade.

Drawing on Hont’s (2005, 1-156) discussion of the “jealousy of trade,” I propose a

second, more realistic counterfactual. To understand much of 18th century writing on

trade, Smith included, we need some background about sustained commercial war.

We now know that, between 1689 and 1815, Britain and France were at war in more

years than not; and in many of the years of peace, they were preparing for war (Finlay

and ‘O’Rourke 2009, 247, Hont 2005, 24; North and Weingast 1989). If Britain were to

abandon the American colonies, might not France spring to action? Suppose that, to

capture benefits from the American trade, France had offered the Americans extensive

subsidies and privileges to ally with her against Great Britain. The new arrangement

would hurt Britain in several ways. First, it would have reduced Britain’s participation in

or even entirely excluded from the American market, including various naval stores and

other commodities of high military value that had been protected by the Navigation acts.

Second, the extent of the British market would have shrunk considerably, reducing the

division of labour and hence producing economic contraction, not growth. Third, the

French would experience the increasing division of labour and subsequent economic

growth, thereby gain economic and financial power and potentially allowing it to triumph

over the British.

In discussing Britain’ foreign policy (the Navigation Act’s preservation of Britain’s sea power and

adjudicating the balance of power in Europe), Hont (2015, 125) questions Smith’s dubious presumptions:

“Smith thought that these two activities could be financed from the profits off foreign trade, tapping into

mercantile profits and using emergency powers if war made it necessary. This idea assumed, of course, that

international trade took place in the great mercantile republic of mankind under rules of neutrality, allowing

commerce to continue even during war.” Whatever Smith’s hopes for free trade during its many wars with

the Dutch followed by those with the French, they did not match reality.

Although Smith does not use the phrase, “jealousy of trade,” he clearly understood the concept.

Smith’s good friend, David Hume, discussed the concept in his essay of that title (Hume 1752).

Barry R. Weingast, 2025

Given its sustained military rivalry with France, Britain could not have been indifferent

to the economic and military implications of the second counterfactual. Smith's claim that

Britain had spent huge funds in the Seven Years War (1756-63) defending the colonies

solely for the latter’s benefit cannot be sustained. Security and defence are legitimate

public goods enhanced by navigation policy, and many of Britain’s trade restrictions can

be interpreted as such. In this militarized international environment, the gains from

exchange from the colonial trade made Great Britain far richer than otherwise. The fiscal

and military resources on which Britain could draw were therefore considerably larger

than it would have been without its American colonies.

5.1. Modern International Relations Theory.

To help adjudicate among Smith’s incompatible views of empire, I draw on modern

international relations theory. This theory provides important insights into the optimal

strategies countries should pursue during sustained military rivalries. I begin with

Fearon’s (1995) seminal answer as to why we observe wars despite it being costly. The

paradox is that both parties to a war are better off negotiating instead of fighting. Fearon

explains that bargaining problems often prevent such agreements to avoid war. For

example, asymmetric information problems often lead to different beliefs about relative

capabilities of two potential military combatants. If party one believes it is much stronger

than party two believes it is (i.e., party one), then the largest offer party one may offer

party two can be lower than the lowest bargain party two would accept. In this setting,

the two parties cannot agree to a bargain that prevents war. Asymmetric information

problems can lead to an international environment where security is an omnipresent

problem, as between Britain and France in the 18th century.

Powell’s (1991) classic work on relative vs absolute gains provides additional insights

into policies countries pursue in the face of international security problems (see also

Hirschman 1945, 9). Recall the example above about the exchange in which one country

gains one-third of what a second country gains. Should the first country accept the trade

deal? Presuming peace, international trade economists, including Smith when advocating

his first view, say yes. Both countries are better off from the exchange even if the

distribution of benefits is asymmetric.

Not so fast! Powell demonstrates that the answer to the question about the asymmetric

exchange depends on the assumptions about security. If the international environment is

peaceful with a very low threat of war, the typical implicit assumption of international

trade theory, then the answer is yes. Country one is better off with its share of the gains

irrespective of the size of country two’s gains. In contrast, if security and war are constant

problems – for example, if the two countries are long-term military rivals – then the

asymmetric exchange may make the second country worse off. Because the exchange

increases the power of country two relative to country one, the exchange raises the

probability that country two will defeat country one in war. Country two can therefore

Similarly, problems with credible commitments can also make it impossible to implement a bargain

that makes both parties better off.

Barry R. Weingast, 2025

extract more from country one in negotiations (Powell 1991; see also Fearon 1995,

Hirschman 1945, and Morrow, Siverson, and Tabares 1998). This exchange enhances the

relative military capacity of country two and is therefore a bad deal for country one.

Hont (2005, 23-4) reports that the famous 17th century French finance minister, Jean-

Baptiste Colbert, relied on this logic: “Colbert's policy was to wage commercial war

against Europe with any means at his disposal… [H]e wished to increase France's share

of European shipping immediately, by physically destroying Dutch capacity if

necessary.”

Instead of engaging in trade, each country in a military rivalry has strong security

incentives to separate its economy from its enemy’s. The value of an empire in this setting

is to expand the country’s economy, increasing the extent of the market and hence the

division of labour and economic growth. Given a military rivalry, it may be optimal to

build an empire that approximates free trade within, subject to military qualifications,

while being closed to military rivals (on the last point, see WN IV.v.a.36, 522-23).

As evidence of this view, consider the United States and its allies during the cold war.

This era is widely known as an era of globalization and relatively free trade. Globally,

tariffs generally fell during this era. Policies promoting free trade had one big exception,

however: the deliberate prohibition of trade with the Communist Bloc of nations.

Why

did they do that? In the context of this multi-generation conflict, the object of the United

States’ trade policy was to deny the Communist Bloc vital military supplies and the

Smithian benefits of the division of labour in a far larger global market. None of this

argument implies an endorsement of mercantilism as a normatively attractive ideal. But

it does suggest that the optimal structure of trade relationships depends critically on

whether the international environment is one of sustained peace or military rivalry.

To summarize: the theory of empire in an international security environment of

sustained military rivalry holds that countries have incentives to create trade barriers

between empires. These trade barriers served several purposes:

1. to deny opponents valuable military inputs, a form of “raising rivals costs” (Salop

and Scheffman 1983; Hirschman 1945);

2. to limit the size of the opponent’s market and thus restrict opportunities for the

opponents economic growth through the division of labour, and specialization and

exchange (Powell 1991; Hirschman 1945);

Technically, the answer involves how the exchange changes p, the probability that country 2 wins a

fight against country 1 (and hence the probability that country 1 wins is 1-p). If the trade lowers p to p’ <

p, the expected value of trade can be negative.

Smith mentions relative gains at WN IV.vii.c.16, 594-95; in the paragraph that follows this, he gives

tobacco from Maryland and Virginia in illustration. In his discussion of Smith, Winch (1965, 10-11) also

discusses relative gains. A related problem with trade with the enemy is that it can make a country

vulnerable to holdup problems in the event of war (Hirschman 1945); and can provide the enemy with

valuable military resources that it might not be able to obtain otherwise. In this environment of sustained

military rivalry, combatants are led to structure an empire differently from that in a world of global free

trade without war.

Morrow, Siverson, and Tabares (1998) provide the best discussion of this topic, covering both the

international relations literature and the economics literature on international trade.

Barry R. Weingast, 2025

3. to limit the empire’s dependence on strategic materials that an opponent might deny

them during war.

Smith's second and third views, the value of colonies to the metropole can be quite high

if the colonies substantially increase the division of labour and if they provide a cheaper

and abundant source of scarce military supplies.

6. Conclusions

In the presence of a sustained security threat from France, the American colonies

proved a valuable economic and strategic resource to Great Britain. They expanded the

size of the British market, immensely improving the division of labour on both sides of

the British Atlantic. As Smith indicates, the two sides of the British Atlantic each gained

considerable relief of their relative “wants” (WN IV.vii.c.80, 626). The colonies also

expanded the set of investments, raising the return on investment to all British capital.

And the British mercantile policies kept strategic goods out of French hands and limited

the ability of the French to deepen their own division of labour through extensive trade

with the American colonies.

The British paid heavily to protect their American colonies. Although Smith complains

in his first view that the colonies did not contribute taxes to their defence, the colonies

did contribute to the British economy and security in other, important ways. Any

evaluation of the net value of the colonies to Britain must take all these components into

account, not on taxation alone.

Logically, the sustained Anglo-French rivalry favours Smith’s third view and weighs

heavily against Smith’s first view. In a dangerous and insecure world, failure to fight off

France, potentially leading to a world dominated by that country would mean far greater

restrictions on British trade, a much smaller size of its markets, and therefore a more

limited division of labour and hence lower economic growth. Even worse, dominance of

France raises existential issues – might France have come to dominate Britain were

Britain not to have spent so much on security? Therefore, Smith’s complaints that the

Americans did not contribute taxes for their defence is far less credible.

The full implications of the sustained military Anglo-French rivalry appears in neither

in Smith nor in the modern neoclassical economics of trade.

Although free trade may

be optimal in a world of sustained peace, in periods of sustained military competition,

this result seems false. As we have seen, Smith in his first view seems to ignore problems

of domestic and international violence. Yet Great Britain faced sustained, violent conflict

throughout the 18th century (Hont 2005 and Viner 1948). The persistent French threat

required that security had to be an active margin of public decision-making.

Although Smith’s inconsistent statements about the value of the empire to Britain are

hard to reconcile, the social science literatures largely ignore this problem, nearly

On this point, see for example Findlay and O’Rourke (2007), Magnusson (2007), and Samuels (1973).

Barry R. Weingast, 2025

exclusively focusing on Smith’s first view emphasizing free trade; historians have for at

least a century focused on the first two views (see, for example, Benians 1922 and Palen

1979). Smith’s discussion of the costs of empire implicitly assumes away the problem of

war and security, presuming a counterfactual of global peace and free trade from which

to judge the impact of mercantilist restrictions. This presumption underlying Smith’s first

view meant that Smith failed to see how his policy recommendations based on his

normative standard of free trade would have left Britain more vulnerable, less militarily

competitive, and hence worse off in its long-term military rivalry with France. In the

presence of sustained security risks, the appropriate counterfactual is not idealized global

free trade, but one where the Americans allied with the French, partially or wholly

excluding the British from American trade. Unilateral free trade by Britain risked French

hegemony on the continent, over the Atlantic, and control over a (formerly British)

America.

Smith’s second view of empire recognizes the benefits from the empire’s immense

division of labour. In direct contradiction to his first approach, Smith’s second approach

emphasizes that the great benefits of empire arise despite the costs of mercantile

regulations and the costs of monopoly. Finally, I emphasize a third view, one that

contradicts the first view while complementing the second. This view emphasizes the

military benefits of the British Empire in a hostile world. In this approach, Smith says

that navigation regulations that make Britain more secure are worth their costs in

diminished “opulence.” Britain’s military rivalry with France led, rationally, to forms of

mercantilism: Build an empire that approximates free trade and a common market within;

but with strong barriers to trade across empires.

Drawing on international relations theory, I discuss how the optimal trade policies with

respect to empires in a world with considerable security threats differ from those of peace.

Removing these restrictions unilaterally would not make Britain better off because this

policy change would have Britain more vulnerable to France. The American colonies

contributed in numerous ways to the larger wealth and security of Great Britain wholly

apart from taxation: they enlarged the “extent of the British market” and hence division

of labour; they raised the returns on British investment; and they kept strategic materials

away from military rivals. More importantly, the British empire had two direct effects

with respect to France: it limited France’s participating in the gains from major portions

of the American trade, thus restricting the extent of the French market and its division of

labour; and it prevented an American-French alliance that might exclude the British from

the American market.

Smith wrote the Wealth of Nations in the post-Seven Years’ War (1756-63) era. This

war eliminated the French threat to the British colonies (but not the French threat to

Britain as the rise of Napoleon would prove).

Because the security threat to the empire

had dramatically fallen, the value of global free trade had risen. Appositely, Magnusson

(2007:46) dates the last English work on mercantilism as James Steuart’s Principles of

Political Economy (1767), immediately following the Seven Years’ War.

I observe that Napoleon attempted to exclude Britain from trade with the European market.

Barry R. Weingast, 2025

Acknowledgement

The author gratefully acknowledges Jim Fearon, Judy Goldstein, Doug Irwin, Glory

Liu, Naomi Lamoreaux, Margaret Levi, Roger Noll, Malloy Thomas Owen, Marc-

William Palen, and John Wallis for helpful comments.

Funding

The research received no specific grant from any funding agency in the public,

commercial, or not-for-profit sectors.

Conflicts of interest/Competing interests

The author state that there is no conflict of interests. The funders had no role in the

design of the study; in the collection, analyses, or interpretation of data; in the writing of

the manuscript, or in the decision to publish the results.

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