A Commentary on Adam Smith and International Business

By Forsgren, Mats; Yamin, Mo | Multinational Business Review, Spring 2010 | Go to article overview

A Commentary on Adam Smith and International Business


Forsgren, Mats, Yamin, Mo, Multinational Business Review


Abstract:

A close reading of Adam Smith's works, "An Inquiry into the Nature and Causes of Wealth of Nations" and "The Theory of Moral Sentiments," indicates that he would not support the advocacy of free markets wholeheartedly. His view on market systems, although "free," implies strong institutions and regulations. Adam Smith would have been particularly concerned with the fact that the large multinationals are as much political actors as they are economic actors. He would have argued that there may be 'moral' limits to globalization. In his view, the general rules of morality are (in modern parlance) 'socially embedded.' Thus, sympathy and fellow-feeling mostly operate at 'close quarters' and, in particular, they may not be effective at a transnational level.

INTRODUCTION

In this paper, we reflect on our reading of Adam Smith's most important publications: "An Inquiry into the Nature and Causes of Wealth of Nations" (1776) and "The Theory of Moral Sentiments" (1759), from a broadly international business perspective. We organize our reflections around the following quasi-rhetorical question: If Smith were alive today, would he belong to the Adam Smith Institute (the leading pro-market 'think-tank')? Although now famed for his advocacy of the market and the so-called 'invisible' hand, our reading and interpretation of his original works suggest that Smith would not necessarily wholeheartedly support the advocacy of free markets enthusiastically undertaken by the Adam Smith Institute: he would share many concerns with writers who view the 'retreat' of the state with apprehension (Strange 1996) and with those who consider that globalization may have gone 'too far' (Rodrik 1997). With respect to the 'invisible hand,' a reasonable interpretation is that the market system requires strong institutions and strong regulation: individuals pursue their interests within the rules of well-defined games in which attempts by the powerful to influence the institutions are not allowed. With respect to the multinational enterprise, our interpretation is that Adam Smith would have been particularly concerned with the fact that the large multinationals are as much political actors as economic ones and that they may exert more political power than representative and (at least partially) accountable institutions, such as governments.

Focusing on "The Theory of Moral Sentiments," our interpretation is that Smith would have argued that there may be 'moral' limits to globalization. In the book, Smith develops a theory of individual moral responsibility. Although individuals are fundamentally disposed to 'sympathy' and 'fellow-feeling/ the general rules of morality are (in modern parlance) 'socially embedded/ Thus, sympathy and fellow-feeling mostly operate at 'close quarters' and, in particular, they may not be effective at a global or trans-national level. In turn, this suggests that there are inherent difficulties in developing overarching institutions that commend general legitimacy.

ADAM SMITH AND INTERNATIONAL TRADE THEORY

Adam Smith and International Trade

In "An Inquiry into the Nature and Causes of Wealth of Nations" from 1776, Adam Smith lays the foundation for the international trade theory that was later formulated and developed by Ricardo, Heckscher-Ohlin, Burenstam-Linder, Vernon, Krugman, and others. The basic message of the book is that countries will prosper from trade with each other because they can exchange advantages and use division of labor. This view is in contrast to what was the dominating mercantilist view at the time that a country must maximize its exports and minimize its imports as much as possible in order to maximize the country's gold reserves. Smith shows that trade is beneficial for both countries in terms of productivity and growth; therefore, "An Inquiry into the Nature and Causes of Wealth of Nations" is a plea for a non-protectionist policy. It is also said to be a plea for liberalism, in which the market plays a central role and the state a limited role. …

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