War, Trade, and Mercantilism: Reconciling Adam Smith's Three Theories of the British Empire

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 in 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.