Question

2. What is the relationship between the economic philosophy of Adam Smith and the Dutch and British East India Companies?

Answer 1

Adam Smith was a critic of the 18th century corporations that circumvented the operation of the market by obtaining monopoly power from the state.The way he analysed the role of government in business affairs and the framework that explained the free market still holds true.

From the 15th to 18th century, the European economies were endured by the theory of mercantalism. In those days, the primary source of wealth was gold and silver, and the State could acquire wealth by encouraging trade, or trade, or rather export, by private companies. Their sucess would contribute to the state revenue and in return, the state would guarantee their mercentile sucess. In the process, the world's first commercial corporation- The British East India Company (EIC) came into existence, which established to trade with the East Indies, became a monopoly of British overseas trade everywhere, and governed India from the 1770s to 1858. During this period, it expanded into a vast enterprise, conquering the regional powers in India and excercising a total monopoly on trade. The magnitude of the company was that, it ruled over a fifth of the world's population with a quater million of private army.

India's Encouraging Conditions

India's foreign trade during the 1770s included textiles and spices in exchange of gold and silver. Indian goods enjoyed a tremendous reputataion in the European markets and in the Middle East. India came to be known as the "land of precious metals". On the other hand, most of the European goods like woollen garments, lead, tin, coral,Iron, etc., brought to India were either exchanged with certain commodities or remained unsold for quite sometime. Import of foreign goods did not prevent India from absorbing a large pportion of the gold and silver of the world, gained through a vareity of channels.

The EIC made huge profits by trdaing with India. The export of bullion by the company to the East were estimated to be anywhere around 800,000 per annum. The Company exported no fewer than a million pounds of goods annually during the year 1698-1700. The growth of trade during this period was the most important factor in the development of the company, which flooded Europe with the Indian goods, especially cloth.

Adam smith (1723-1790)

The 18th century Scottish political economist and philsopher, and the founding father of free trade who became famous for his influential book "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776), laid the intellectual framework that explained the free market which still holds true. He is oftten remembered for the expression "the invisible hand", which he used to explain how self-interest guides the most efficient use of resources in anation's economy, with public welfare coming as a by-product

Adam Smith argued that investment at home generates more "revenue and employment" than investment in foreign trade. Self Interest motovates the entrepreneur to invest at home than in foreign trade. He saw the interests of big capitalists conflicting with those of the public: capitalists seek profits which corrupt and impoverish soceity. He criticised the way British mercantilism divided the world into parcels, granted the merchant's buisness monopolies, and the corruption of the EIC. Adam Smith emphasised the importance of free market and free trade. To him, there was a convergence of individual and social interests through a free market economy. His premises of free trade are as follows:

• National wealth comes from agricultural produce.
• The farmer and the state shared the same pool of money.
• High tariffs on imported goods meant higher prices for the farmers, and less money for the state.
• Higher tariffs would lead to less investment on the farm hence farmer could not raise crop yield the following year, and this would decrease the tax base for the state.
• Higher tariffs will also lead to trade monopoly in England and depletion of farmer's resources.

Adam Smith expounded the sciendific rules for the study of economic and government intervention in economic activities. He championed the cause of the small and medium sized merchants and traders, and in that sense was "progressive" by today's standard. Smith's portrayal of the free market economy remains the centrepiece of economic theory. Smith developed much of the theory about markets that are regarded as standard theory even today.

In 1772, Adam Smith's friend William Pulteney recommeded him to the directors of the EIC, as a member of a commission of inquiry in their administration to be sent to India. Adam Smith, in a letter, dated September 5, 1772, accepted the appointment. Adam Smith highlighted the government-granted monopoly of the EIC and its abuses and inefficiencies. He argued that the Bengal drought was turned into a famine due to the EIC incompetence.

Adam Smith suggested that the workers must be made stakeholders to achieve the greatest possible productivity from them. He quantified the benefits of mechanisation but also grapgically illustrated the alienation caused by monotonous factory work. He described the divergence of interest that resulted from the ownership in large corporations;he recognised that top management would not be motivated to create personal wealth unless they too are corporate stakeholders.

The Greedy Merchantilist System

Most European nations, between 16th and 18th century adopted merchantilist policies, which resulted in the colonial expansion. The goal of these policies was, supposedly, to achieve a favourable balance of trade that would bring gold and silver into the European region. The merchanlist theorists like David Hume and Adam Smith believed that a country should have an excess of exports over imports i.e, favourable balance of trade, to bring in money into the country. They recommended legislation to restrict the use of foerign goods, encourage exports, and forbid the export of bullion.

However,the British merchants tries to accomplish this by promoting the imports of cheap raw materials and exports of finished, manufactured goods. The colonies were forced to purchase these goods from the British and had no alternatives i.e the British had establishedtrade monopolies. Nonetheless, adam Smith and David Hume were two important opponents of these policies and considered them unfair and inefficient. Adam smith promoted a laissez-faire approach for governments to operate. He stated that a government should not create monopolies because they could be "dangerous to prosperity".

Also, government should not keep wages low for its workers and force people into jobs. Adam Smith also did not like the idea of subgroups controlling the economy. He also felt that trade should be zero-sum game but rather a positive-sum game, The comparyive advantages of nations should be utilised, but in mercantilist policies, these advantages remain unexploited. Adam Smith saw that monopoly ruined the market system, and the fact that the government created monopolies was one reason that led him to advocate a minimal economic role for government.