4.5 Bounties
Bounties function similarly to drawbacks, though they are not granted in reaction to foreign tariffs, but proactively to make domestic goods cheaper in foreign markets, as a means of underselling the competition in foreign markets.
In a system of free trade, producers gain a revenue from selling products at a price buyers wish to pay. The needs of the domestic market are first satisfied, and when it is more profitable to sell in a foreign market (where buyers are willing to pay a price that is higher by at least enough to cover the costs of transportation), the surplus is exported.
A bounty paid on export thus encourages producers to sell abroad when it would otherwise be unprofitable for them to do so - and in effect, to create an unnatural shortage of goods in the local economy by making it more profitable for domestic producers to sell them abroad. Citizens of a nation are thus thrice deprived when a bounty is implemented: fist deprived of available goods, second made to pay higher prices for goods that are available, and third in paying the taxation that funds the bounty.
(EN: Smith spends quite some time refuting the benefits of bounties, which generally comes back to the points previously made. Apparently, it was a hot topic in his time, particularly among pamphleteers who seemed bent on moving public sentiment in favor of bounties by suggesting they are beneficial to the general welfare of the nation. Smith suggests such efforts were ultimately the work of certain industries for whom bounties were a greater source of profit than the actual production of goods.)
Digression Concerning the Corn Trade
Smith means to examine the corn trade in England, in that it is subject to a great number of regulations that are "altogether unmerited." He acknowledges this is a digression, but given the attention to this issue in his day, he felt it justified a digression of some length.
He defines four categories of merchant: the inland dealer, the merchant importer, the merchant exporter, and the merchant carrier.
Inland Dealers
The inland dealer serves as a commodities broker on behalf of the seller. He seeks to obtain as high a price as he can get for corn, given a quantity available to be sold. If he sets the price too high, he will not be able to sell his commodity; if he sets it too low, he will sell his entire stock at less of a profit than he might have obtained.
His interest in business is his own profit, derived from the profit of the seller. While there is some societal function in apportioning the stock of available provisions among various members of the public according to their need of it, his sole concern is maximizing profit. That a buyer in greater need will be inclined to offer a higher price is coincidental.
It is noted that in certain instances where a single company controls the entire stock, it might be in their interest to "destroy or throw away" some considerable part of it in order to keep up the price of the rest - in effect, to artificially limit supply to the most profitable level. While this has been seen to occur in certain instances (Dutch spice traders), the gross quantity of corn and the number of suppliers and customers make it scarcely possible, "even by the violence of law" to control supply in this manner.
It's also noted that the inland dealer is generally engaged to dispose of surplus rather to ration a scarce commodity. The farmers in a given area need no assistance to sell to the bakers and brewers in their vicinity, thus the broker is engaged only to sell quantities of which the farmer cannot dispose to more distant markets where demand exceeds supply. The immediate supply of corn to local markets is this subject less to the supply and demand of corn, and more to the farmer's consideration of his own expense, profit, and the amount of money he must make to continue farming in the following season.
Whoever considers, with attention, the history of famines over the two preceding centuries, will find that it has never arisen from the dealings of brokers - that is, famine does not occur because customers cannot afford to purchase food, but because food does not exist to be had. As such, the several famines that have occurred in recent year arose either from natural causes (drought or blight), and were exacerbated by the attempts of government to remedy shortages that, but for their interference, would not likely have resulted in widespread famine.
Given the variety of climates and locations in which wheat is grown, in is inconceivable that there would arise disaster on a scale that would affect all crops in all locations; and given that farmers are capable of producing far in excess of the demands of consumption, it is a relatively simple matter to transport the excess of unaffected regions to those where crops are lost, albeit at a higher price due to costs of transportation. Left to their own devices, brokers would manage the redistribution of crops as necessary - though some might get less than the amount to which they are accustomed, and might even suffer from hunger, there is little risk of a complete absence of food and a resulting famine.
When the state, in order to remedy the inconveniences of shortages, interferes with free exchange, it exacerbates the problem. To insist that dealers provide it to consumers in areas where crops are lost at the same price as if there were no dearth, even at their own expense, they are inclined to provide none at all. And when consumers can obtain a good at its regular price, they are inclined to consume in their regular amounts rather than rationing their own consumption. Moreover, where rationing occurs, panic ensues, leading to hoarding of unneeded stock and over consumption. The balance of supply and demand result in an increase in the price of scarce goods and a decrease in their availability, but not so dramatic a change as intervention of the state.
It's also noted that some inland dealers, who take possession of stock rather than merely arrange the exchange of the stock of others, must absorb the risks of both surplus and shortage. In years of surplus, the dealer makes scarcely any profit, and on occasion sells at a loss, due to the unanticipated abundance. His motivation for doing so, and his ability to weather a bad year of trade, is that he earns higher profits in time of scarcity. If the need of customers in time of scarcity is used to justify robbing the dealer of his profits, he will be unable to weather the losses of times of abundance.
The value of the dealer was discovered during the reign of Edward VI, who made it unlawful for individuals to "engross" the cost of corn by selling it at a higher price than he purchased it (punishable by imprisonment, torture, and the state seizure of all his property). It's noted that this law was deemed necessary not because of any function of the free market, but because in previous years, it was unlawful to sell grain without a license - it being assumed that dealings between the baker and the farmer would be more fair under the guidance of a disinterested mediator (in effect, to prevent them from acting in their own interest) - but what resulted was the necessity of engaging a unnecessary party, who exercised a monopoly of the buying and selling of wheat, and who used this power to his own profit.
Ultimately, the use of one ill-conceived law to counteract the effects of an even worse one led to the collapse of wholesaling in the grain industry. Without the services of a broker, most farmers could sell only in their own vicinity. In years of surplus, there was waste; in years of shortage, there was starvation; and without the services of the inland dealer, there was no-one to broker the transfer of goods from an area of surplus to an area of shortage.
This perpetuated until some years later, as a series of subsequent statutes gradually raised the rate at which the price of wheat could be engrossed. The effect of any abatement is merely to restore some portion of trade: brokers traded corn when the limits on mark-up made it possible to do so profitably, and refrained from trading when it was not possible to earn a fair profit under the restriction. So the net effect was not to make wheat available at a fair price, but merely to make it unavailable when the natural price exceeded what was permissible by law - in essence, to throttle quantity available rather than selling price.
Smith suggests that the fear that suppliers will artificially engross the price "may be compared to the poplar terrors and suspicions of witchcraft." In effect, it is entirely irrational, and when the state caters to such nonsense, it inflicts great harm on some, and grants no benefit to society as a whole.
"I have no great faith in political arithmetic," Smith asserts, nor in the notion that politicians are endowed with a broader perspective of greater wisdom than any common man in seeing the satisfaction of his own needs, nor that force of law is more effective than voluntary cooperation among men for arriving at a solution that will be fair and beneficial to all.
Merchant Importers
The merchant importer obtains foreign wheat for home consumption, at such times as it is needed and at such prices as the domestic market is willing to pay. When there is sufficient wheat, at a sufficiently low price, available in the domestic market, there is no need of the services of the merchant importer - and as a result, if wheat is being imported at all, it is because it is available at a lower price from foreign sources, which somewhat decreases the average price of wheat in the domestic market bu the availability of cheaper foreign goods.
Merchant importers make their profit by obtaining wheat from foreign markets at a lower price and increasing the cost, keeping the margin to themselves, and are restricted in the amount they can increase the price by the need to be competitive with domestic providers. They therefore reap the greatest profit when there is a great disparity between local and foreign prices.
Another key factor is that, in order to obtain wheat from the foreign market, the buyers in the domestic market must produce something else to offer in exchange for it. In effect, this encourages efficiency in the choice of production: people who can be more productive at a trade other than growing grain are able to do what they are best at, and trade the product of their work for grain. This is so, even in isolation, but the opportunity to obtain food from abroad enables greater specialization of labor in the domestic market.
Thus, to discourage the import of wheat from foreign markets is to require a greater proportion of the domestic population to engage in production of wheat for local consumption, rather than applying themselves to other trades at which they would be more productive, to the loss of themselves and the general public that is deprived of more valuable goods that might have been produced were those skilled at producing them able to do so.
The other drawbacks to trade restrictions by means of tariff on imported goods have already been considered at some length, in the earlier chapters of the present book.
Merchant Exporters
The merchant exporter sells abroad wheat that was produced domestically. While the concern of the exporter is his own profit, his function is to dispose of surplus production, providing the producers with revenue on goods that would otherwise have gone to waste. Unless the growers have such ability, they have no incentive to grow more than domestic consumption will require, and the error of their judgment would result in waste or scarcity (the latter of which is addressed by importation).
The prohibition of export is based on the notion that growers would rather sell their wheat abroad than in the domestic market, to generate a profit for themselves while their nation starves. While there has never been documented a historical incident of this kind, the irrational fear of its possibility, however remote, has led to periods in which the exportation of wheat was forbidden or restricted.
The prohibition of export during the rule of Charles II forbade the export of wheat so long as the domestic price remained below a certain level. While the notion was that scarcity would increase price above a given amount, and this edict would prevent its exportation in such occasions, the theory was never tested as the state never did derive much revenue. As such, the edict was entirely useless except in allaying the aforementioned concerns.
Smith observes that, in general, the interference of the state in matters of import and export have been subject to constant adjustment to reflect supply and demand, and quite some time has been wasted in implementing temporary measures or adjusting legislative restrictions when objections were raised at times when prices were expected to rise or fall beyond the bounds of law. One might consider this "good government" in its responsiveness, but it seems a frivolous waste of time to have to constantly adjust laws to ensure that they accommodate behavior that would result if there were no laws at all. At yet, the notion of free trade seems inconceivable to states and very few nations have entirely adopted so liberal a system, though it is noted that the prosperity of a people tends to reflect the degree to which government refrains from interfering in trade, government restrictions having had no other effect than to diminish the prosperity of productive people and aggravate the misery of those less fortunate.
Returning to the notion of restricting exportation, Smith concedes that it may be necessary in some of the "little kingdoms" of continental Europe for exportation to be restricted, given the small number of suppliers and the relative ease of moving grain over land, but in any country of significant size, there are a sufficient number of producers in great enough variety of climate and geography that disaster cannot strike all at once, and the movement of goods within the nation would suffice to balance the scarcity in one region with the surplus of another. But the same would be true if the "little princes" desisted in their meddling and allowed all of Europe to function in the same manner, with free trade to facilitate the flow of goods to the locations where they are most in demand.
Merchant Carriers
The trade of the merchant carrier is the transportation of goods, generally limited to logistics, who derives his profit from the handling of freight. Aside charging for the cost of transportation (plus his own profit), merchant carriers have little impact on the prices of the goods and have been seldom considered a significant component of trade.
However, the restriction of trade, from tariff to prohibition, influences the volume of goods being traded, and thus has an impact on the profit of merchant carriers - the fewer goods being imported or exported from a nation, the less revenue is made by those in "the carrying trade."
Conclusion
The system of laws that promise the improvement of prosperity "seems to deserve no part of the praise bestowed upon it." It is not by the assistance of government, but the absence of it, that production and trade flourish, and the improvement of prosperity in Britain, particularly, may be ascribed not to the consequence of law, but to how little the law has concerned itself with commerce. While industry is "far from being perfectly free," it is often more free than in any other part of Europe, and is more prosperous as a consequence.
The inclination of every individual is to seek the betterment of his own conditions - law cannot increase his inclination, but can do much to discourage him. Aside of being safeguarded in his possession that he might enjoy the fruit of his own labor, there is nothing a government can do to increase prosperity.
By contrast, Spain and Portugal are as expansive as Britain, and enjoy the richest bounty of gold and silver from their colonies in the Americas. And in spite of this, Spain and Portugal are "perhaps among the most beggarly" nations of Europe - their extensive taxation and regulation of agriculture and industry have destroyed their industry and, in spite of prohibitions n the export of precious metals, have largely been drained of them to obtain from foreign markets those goods that, but for the interference of state, could easily be produced domestically.