Adam Smith on Good Wine and Free Trade

Found in An Inquiry Into the Nature and Causes of the Wealth of Nations (Cannan ed.), vol. 2

The Scottish moral philosopher Adam Smith (1723–1790) was the author of two books, The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776).

He is best known today for his economic arguments, especially arguments in favour of free trade between nations. In Book IV, Chapter 2 of Wealth of Nations, Smith writes:

By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?

Though there were attempts to grow tropical fruit in Scotland in the 17th and 18th centuries, this suggestion is meant to be absurd. Smith says in the same paragraph that Scotland will never seriously compete with France in winemaking and this is “acknowledged by all the world” and trying to force Scotland to become self-sufficient in wine “would be a manifest absurdity”.

In the economic system presented by Smith, prices provide information to the owners of capital that guides them towards the investments that will serve the needs of the most people. Since capital (measured in Smith’s work in terms of money available to be spent on production) is finite, the different uses for it compete in the form of prices stemming from the demands of consumers.

Building greenhouses and hotbeds would divert resources from other investments that could produce more value with each dollar. Proceeds from more profitable Scottish production can be traded for wines made in France, where the climate is able to support vineyards without so heavy a capital investment and good wine can therefore be produced at a lower cost.

At the same time, prices provide information to consumers that helps them to meet their needs at the lowest cost. Very expensive Scottish wine would encourage Scots to satisfy their thirst with other beverages that wouldn’t pull so many resources away from more useful investments.

So even if the government were to ban importation of all foreign wines, it seems unlikely the prices they would need to command to justify the investment (thirty times the price of French wines!) would leave many willing buyers. Better, says Smith, to rely on specialization, the division of labour, and trade to provide Scots with their wine.