Thoughts on economics and liberty

Adam Smith Pharmacy: Advice on protection of industry

I'll periodically share advice from the Adam Smith Pharmacy – the economic medicine shop that has been available since 1776 to anyone who wants a wealthy nation. I'm referring to The Wealth of Nations (2.5MB, Word).

Smith's FREELY AVAILABLE medicine can make even the most moribund and decadent nation perk up with health and wealth. One just can't avoid becoming wealthy if one imbibes Adam Smith's medicine.

Of course, India being a special case, different from the rest of the world is a place where arrogance and jingoism applies, not rational logic. India never bothered to listen to anyone who not known by the name of Kautilya or Marx (i.e. Nehru's patron saint) – or (now) Amartya Sen. If Kautilya had said the things that Adam Smith said we would have followed these like sheep. But Kautilya was a statist. He NEVER understood how to create wealth. And Nehru, of course, had absolutely no clue about wealth generation. The thing a socialist hates most is Adam Smith. 

Repeatedly, over and over again, Adam Smith has been vindicated. HIS MEDICINE ALWAYS WORKS. But we avoid reading Adam Smith. Very big mistake! I recommend two books to start off your journey of Adam Smith (1) The Wisdom of Adam Smith by John Haggarty and (2) On The Wealth of Nations by P.J.O'Rourke. 

The following are two circumstances when Adam Smith agrees that protectionism is valid: 


There seem… to be two cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry.

The first is, when some particular sort of industry is necessary for the defence of the country. The defence of Great Britain, for example, depends very much upon the number of its sailors and shipping. The Act of Navigation, therefore, very properly endeavours to give the sailors and shipping of Great Britain the monopoly of the trade of their own country in some cases by absolute prohibitions and in others by heavy burdens upon the shipping of foreign countries. 

… The second case, in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry is, when some tax is imposed at home upon the produce of the latter. In this case, it seems reasonable that an equal tax should be imposed upon the like produce of the former. This would not give the monopoly of the home market to domestic industry, nor turn towards a particular employment a greater share of the stock and labour of the country than what would naturally go to it. It would only hinder any part of what would naturally go to it from being turned away by the tax into a less natural direction, and would leave the competition between foreign and domestic industry, after the tax, as nearly as possible upon the same footing as before it


Note that Adam Smith DOES NOT allow sheltering industry on account of the "infant industry" argument or to support a strategic advantage (a flawed concept that has ruined taxpayer money in every country it has ever been attempted), or to subsidise "green" industry. ANY nation that violates these principles will DESTROY its wealth. That is guaranteed. No exceptions.

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5 thoughts on “Adam Smith Pharmacy: Advice on protection of industry
  1. Vijay Mohan

    Hi Sanjeev,
    I didnt get second point .. ??Does it mean taxing more to foreign and normal to home industry??

  2. Sanjeev Sabhlok

    Adam Smith is saying that if you impose at tax of, say 30% on a domestic industry (e.g. corporate tax), then you should aim to equalise the tax that the foreign producer pays. Let’s say that the foreign producer is taxed at 20% in their country of origin. Then, after deducting transportation charges of 2% (this is implicit, else there will be no equalisation), the imports of the foreign producer can be taxed at 8%, thus ensuring that both pay 30%. The competition between foreign and domestic producer would then be equalised.

    This argument underpins the anti-dumping provisions of WTO, whereby China (say) is forbidden from subsidising its domestic exports to India to undercut the local producer in India who is required to pay, say 30% tax.

    Note that Adam Smith is for the full impact of competition, but does not want to advantage one side over the other.


  3. Vijay Mohan

    Thanks Sanjeev,
    Good explanation … and fantastic policy..
    We can discuss example of China.. China market is subsidized like it is in many countries …
    and I dont think Indian Govt is imposing such schemes.. because of the price differences we see in chinese products and other products..
    China market is also flavoured with very low salary or at some places ..only food is provided no salary at all..    though it is equivalent to say workers are equivalent to slaves there .. Plus very low electricity rates and cheap land available ..isnt it justified to put even more tax on chinese products..    ??

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