There have been several references in the media to the inability of President Trump to control the financial markets. Why is that? What forces are at play, and how can they be explained?
If you studied finance or economics, Adam Smith’s name will certainly be familiar to you. For those who do not know him and why the markets are reacting the way they have been, I believe you have to look no further than Mr. Smith’s ideas.
Instead of writing a blog on the topic, I thought I would ask ChatGPT the following question:
“Who is the economist Adam Smith and how do his theories apply to the current economic situation in the U.S. given the increase in tariffs?”
Here is the response:
“Adam Smith (1723–1790) was a Scottish economist and philosopher, widely regarded as the father of modern economics. His most influential work, The Wealth of Nations (1776), laid the foundation for classical economics. Smith advocated for free markets, limited government intervention, and the idea that individuals pursuing their own self-interest could unintentionally contribute to the overall good of society — a concept famously referred to as the “invisible hand.”
Key Adam Smith Ideas:
- Free Markets: Smith believed that markets operate best when left free from government interference.
- Division of Labor: He argued that productivity increases when workers specialize in specific tasks.
- Invisible Hand: When individuals act in their own self-interest, they often promote economic well-being more effectively than if they were trying to do so directly.
- Laissez-faire Economics: He generally supported minimal state intervention, except in areas like defense, justice, and public works.
Applying Smith’s Ideas to Current U.S. Tariffs:
Recently, the U.S. has increased tariffs on a range of imported goods, especially from countries like China. Let’s look at this through a Smithian lens:
1. Free Trade vs. Protectionism
- Smith’s View: Tariffs distort markets by making imported goods more expensive, reducing competition, and ultimately hurting consumers.
- Current Situation: Tariffs aim to protect domestic industries, but they can lead to higher prices, inefficiency, and retaliation from trading partners — all things Smith would likely criticize.
2. Impact on Consumers
- Smith believed competition and free trade lowered prices and increased choices for consumers.
- Tariffs often raise prices for consumers, which Smith would see as a direct harm to the public interest.
3. Government Intervention
- While Smith accepted some state roles (e.g., infrastructure, law enforcement), he would probably view strategic tariffs — unless for national security — as government overreach that hinders the market’s natural efficiency.
4. Invisible Hand Disruption
- By interfering with market prices through tariffs, the government disrupts the invisible hand mechanism. This may prevent resources from flowing to their most efficient uses — which Smith would likely argue leads to economic inefficiency.
In Summary:
Adam Smith would probably be skeptical of the recent rise in U.S. tariffs. While he acknowledged exceptions (like retaliation or national defense), he fundamentally believed that free trade and minimal interference produced the greatest good. Tariffs, in his view, distort natural market dynamics, reduce overall wealth, and harm consumers — making them a likely violation of the principles he championed.”
Of course, market stability isn’t helped by bad-mouthing the Fed chair or threatening the Fed’s independence. Nor does constant flip-flopping on tariffs, which seems to be a daily (hourly?) occurrence. Hopefully, for the sake of the U.S. and world economies, the tariff situation will be settled shortly (with much lower tariffs!) and everyone can move on to other matters. Until then, buckle up and enjoy the ride.
