Adam Smith on the “liberal system” of free trade (1776)
Found in The A B C of Finance
One of the earliest uses of the word “liberal” to describe a society in which there was individual economic liberty was Adam Smith’s phrase “liberal system” which he used to describe free trade in contrast to the “mercantile system” of restrictions and laws:
Were all nations to follow the liberal system of free exportation and free importation, the different states into which a great continent was divided would so far resemble the different provinces of a great empire. As among the different provinces of a great empire the freedom of the inland trade appears, both from reason and experience, not only the best palliative of a dearth, but the most effectual preventative of a famine; so would the freedom of the exportation and importation trade be among the different states into which a great continent was divided.
This passage on the benefits of free trade in agriculture is noteworthy for several reasons. Firstly, it is an early example of Smiths’s use of the word “liberal” in its more modern sense of economic liberty instead of its more traditional meaning of “liberality” or generosity of spirit. Second, it is interesting to see that he uses it in contrast to another system, that of the “mercantilist system” of trade regulations and restrictions. One tends to associate Smith with strong criticisms of “men of system” who wished to impose their vision of a future society on their fellow citizens. Here he seems to accept the idea that there is another “system” which is not necessarily harmful to the liberty of others but which in fact defends it vigorously. Third, he grounds his defence of free trade in grain firmly on utilitarian arguments not upon any right to liberty or property held by the would-be traders. He states that regulating the grain trade may in fact turn a local shortage of food into a more serious famine. And fourthly, he makes a very interesting argument about the similarities between regulating the grain trade and regulating religion. Since people are passionately interested in the things that concern them most, such as food for the body and food for the soul, they put pressure on governments to regulate these matters. Smith however warns that this is not always wise as experience has shown that “we so seldom find a reasonable system established with regard to either of those two capital objects.”