How to engage with Adam Smith in times of growing protectionism

Today, we live in a world characterised by supply chains, artificial intelligence, and multinational corporations whose revenues rival the GDP of mid-sized countries. Yet, reading Smith does not feel like archaeology because his central concerns remain relevant: What creates wealth, and who benefits from it? Are markets still competitive, or are they increasingly shaped by a few powerful firms? Is economic growth translating into better lives, or just higher output?

Smith rejects basic tenets of mercantilism

Smith’s first major argument was against the mercantilists who dominated economic thinking in his time. They believed that national prosperity depended on accumulating gold and silver, and that trade was a zero-sum competition (one nation’s export surplus was another’s ruin). 

Smith dismantled this. In the opening pages of the book, he argued that the true source of a nation’s wealth is the labour of its people, and living standards depend on how productively that labour is applied.  

The idea sounds obvious today. But what is still not obvious, or at least not sufficiently acted upon, is the second part of Smith’s argument: wealth creation is meaningless unless its benefits are broadly shared. This idea still holds significance. Economic growth today is driven by productivity, but the question remains how efficiently labour and capital are used, and whether that growth improves people’s lives.

The idea of the division of labour 

Smith’s most famous contribution was his idea of the division of labour. As mentioned earlier, he used the example of the pin factory to show how breaking down complex production into specialised tasks dramatically raised output. 

Today, this logic underpins the global production of goods. An automobile assembled in Pune may draw on steel from Jharkhand, electronics from Taiwan, software from Bengaluru, and design expertise from Germany. A medicine sold at a Mumbai chemist’s shop may trace its active ingredient from a plant in Hyderabad, its packaging to a unit in Gujarat, and its clinical trials to a contract research organisation in Ahmedabad. This is Smithian specialisation on a large scale. 

The gains from this system are real. And so are its fragilities. Smith himself recognised that a large market is the precondition for deeper specialisation. What he could not anticipate was a world where the supply chains enabling and sustaining that specialisation could be disrupted by pandemic, war, and geopolitical conflicts. 

The ongoing conflict in West Asia is a case in point, which has upended energy supply and shipping routes on which manufacturers, including those from India, depend. 

Hence, the “Invisible hand” seems to coordinate economic activity well in stable conditions. In times of crisis, however, markets do not always absorb such shocks smoothly. Prices adjust, but the burden of disruptions spreads across industries and consumers. This shows a limit to Smith’s framework: institutions – not markets alone – are required to manage crises.

The “invisible hand”

Smith is most often quoted for his idea of the “invisible hand”. But he also reflected on a far more pressing problem: the visible hand of vested interests influencing markets and governments alike. Smith was clear-eyed about the tendency of businessmen to conspire against the public. 

He wrote, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” But free-market advocates often tend to overlook this. 

Smith was not an advocate of unregulated capitalism. He opposed monopoly, regulatory capture, tariffs, and licenses granted not in the public interest, but to protect those with enough power to lobby for them. The villains of ‘The Wealth of Nations’ are not governments, but merchants and manufacturers who use governments as instruments of private advantage. 

Viewed from this lens, the evolution of capitalism over the past century appears less like a triumph of Smithian economics. In India and across the globe, economies have moved decisively away from the world of small, competing producers that Smith described. 

In the US, a tiny fraction of corporations account for a disproportionate share of corporate assets, a degree of concentration unimaginable in 1776. In India too, a handful of conglomerates dominate sectors from telecommunication to retail, ports to airports, cement to media. 

Return of economic nationalism

Smith’s critique of mercantilism – the doctrine that nations should maximise exports, minimise imports, and accumulate trade surpluses – has regained relevance. The world is witnessing a return of economic nationalism, which would have been familiar to Smith’s contemporaries. 

Import restrictions, domestic content requirements, and subsidies for strategic industries are, in many ways, the 21st century equivalents of the Navigation Acts and monopoly charters that Smith spent chapters dissecting. 

But Smith was not dogmatically against all state intervention in trade. He accepted that national security could justify some departures from free-trade principles. At the same time, he insisted that protectionist measures, even when justified and defensible, come at a cost. This cost is typically borne by ordinary consumers in the form of higher prices, and should therefore be temporary and specific rather than sweeping and permanent. 

India’s own trade policy, at times, reflects this tension. The push to build domestic capability in semiconductors, solar panels, and defense manufacturing stems from legitimate strategic concerns. But the question Smith would ask is whether these interventions serve larger public interest. 

Role of state

One of the biggest myths about Smith is that he believed in a minimal, hands-off state. He supported public education, public infrastructure, and the regulation of banking. He understood that markets cannot function without strong institutions: honest courts, enforceable contracts, and public investments in areas where private profit alone would not provide.  

His target was not governments as such, but the governments that served merchants rather than citizens. The solution, in his view, was better government, not less of it. As India debates industrial policy, labour reforms, and the role of the state in an economy that is growing fast, this distinction matters.

Moreover, Smith published his book in the year America declared independence. In different ways, both are rooted in a similar idea: societies exist for the people, not the other way around. 

Why ‘The Wealth of Nations’ remains relevant 

Two hundred and fifty years later, capitalism bears little resemblance to the world Smith had described. The small workshops of the 18th century have given way to megafirms with planning capabilities that rival governments. Ownership is more diffuse than Karl Marx anticipated. Disruption is more relentless than Smith could have expected. And AI is now reviving one of the oldest questions: 

If algorithms can coordinate production and decision-making, who sets the goals, and who bears the cost when systems fail. Smith has no answer to that question. But he had the right instinct. 

The ‘Wealth of Nations’ remains relevant not because it provides timeless solutions, but because it asks the right question. Markets generate wealth, but they do not guarantee its fair distribution. Scale increases productivity, but not necessarily opportunity. 

For developing economies, the challenge is clear. Markets need to be supported by strong institutions. Competition needs to be protected. Public investment needs to improve productivity, and labour needs to be integrated into growth. 

Post read questions

Division of labour increases productivity but also creates new vulnerabilities. Analyse this statement in the context of global supply chains and India’s economic structure.

Examine the relationship between productivity growth and inclusive development in the light of Adam Smith’s conception of wealth creation.

How would Adam Smith assess contemporary industrial policy initiatives such as production-linked incentives (PLI), semiconductor subsidies, and strategic manufacturing policies in India?

Artificial intelligence and platform capitalism are reshaping markets and labour relations. In this context, examine the enduring relevance and limitations of Adam Smith’s framework.

(Pushpendra Singh is an Assistant Professor of Economics at Somaiya Vidyavihar University, Mumbai, and Archana Singh is an Assistant Professor of Gender and Economics at the International Institute for Population Sciences, Mumbai.)  

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