Donald Trump and Adam Smith vs. the Washington Consensus

This year marks the 250th anniversary of Adam Smith’s birth and his influential work, National Wealth. This is fitting because many in Washington have quoted Smith without fully grasping his ideas.

In Washington and among many economists, the prevailing view seems to be that if the government must step in, it should do so in sophisticated ways—like through subsidies, tax credits, and “investments.” Tariffs, on the other hand, are often viewed as crude. They’re straightforward and come with their own consequences. This perspective underpins initiatives like the CHIPS Act and the Suppression of Inflation Act—policies that are acceptable as long as they manifest as federal checks and conferences in luxurious settings.

President Donald Trump sees this entire approach as fundamentally flawed.

He regards the Biden administration’s subsidies as wasteful and potentially corrupt, fostering political agreement, strengthening a cozy elite, and disguising favoritism with rhetoric about national growth. In his eyes, tariffs represent a much more effective industrial strategy. They can enhance profits, maintain market pressure, and open up foreign markets—all while providing domestic producers with reasons to invest, improve, and grow.

While many economists favor the conventional Washington approach, Trump finds an unlikely ally in Adam Smith.

The Forgotten Smith

Smith’s main point wasn’t that imports are great and tariffs are bad; rather, his key insight revolved around the idea that a nation’s wealth comes from its productive capacity. He famously remarked that the labor of each citizen offers the resources necessary for life’s conveniences. He emphasized that consumption is the ultimate goal of all production.

These concepts aren’t at odds; they align. Production is not merely an economic end in itself. But without production, there is nothing to consume. This disregards borrowed efforts and the labor of others.

Modern interpreters of Smith sometimes lose sight of this fundamental point, often clinging only to elements that suit a consumption-driven society. They appreciate imports, low prices, and the sense of sophistication that comes with not needing to be concerned about domestic production as long as supply continues. Yet, they forget that for Smith, wealth wasn’t just access to goods funded by debt, but rather the outcome of labor year after year.

Trade was crucial because it expanded markets, increased the division of labor, and ramped up production. It was beneficial not because it spared the state from producing, but because it broadened opportunities for production.

Smith Against Subsidies

This leads us to a section of Smith’s classic work that many contemporary economists are hesitant to reference.

In National Wealth, Smith is notably critical of subsidies, which he calls bounties. He argued that they direct trade into less favorable channels, promote transactions unsupported by revenue, and misallocate capital, thus fostering inappropriate activities for the wrong reasons.

Smith elaborates on the pitfalls of bounties by analyzing British government subsidies intended for the herring industry—something that might seem outdated to us. Herring was actually a significant commercial product in Northern Europe, and the British government viewed fishing as vital for food security and trade. The subsidy was designed to support the fishing industry by compensating ship owners based on tonnage. But Smith found the model to be flawed.

His criticism of the herring bounty was sharp. He didn’t view the subsidy as wise support for a crucial domestic industry; he regarded it as a scam. Payments were tied to tonnage instead of success, leading ships to chase subsidies instead of actually catching fish. This led to improper practices and misused public funds for minimal results.

This isn’t just a footnote. Smith built a broader argument against subsidies. Incentives cost money and degrade productivity by disconnecting rewards from performance. They entice producers to focus on political favors, rather than serving customers, ultimately distorting the economy and draining a nation’s wealth rather than enhancing it.

This idea rests at the core of today’s Washington model. Subsidies are seen as refined tools—less overtly protectionist. They’re often funneled through tax breaks, loan guarantees, or administrative choices. Dubbed incentives instead of handouts, they cater to the management class that thrives on administration.

But Smith could see through this.

Smith’s Defense of Herring Import Tariffs

Now, we should address a part of Smith’s arguments that might raise eyebrows in polite circles.

In a letter to William Eden written four years later, on January 3, 1780, Smith outlined strategies for boosting revenue without burdening the public further. One of these was to lift import bans and instead impose a “moderate and reasonable duty.” He argued that prohibitions merely established monopolies.

But Smith didn’t stop there.

He stated that bans typically hinder the “improvement and expansion” of the very industries they claim to protect. He then addressed Dutch salted herring. His recommendation wasn’t to exclude it but rather to tax it. Dutch products could still enter the market, just at a higher price. Smith noted that British producers would “eagerly adjust” to this higher price, leading to enhanced quality through better practices. This could ultimately allow them to compete with the Dutch in foreign markets.

Read that again carefully.

Smith isn’t merely arguing that a tax is less damaging than a ban; he claims that taxes can yield positive outcomes. It generates revenue, prevents monopolies, and encourages local producers to enhance their offerings to command better prices.

And keep in mind, the “moderate and reasonable” duty he suggested—a 50 percent tariff on Dutch herring—would create quite a stir on Wall Street and within Washington. This proposal hardly aligns with current consensus, or even approaches it.

Donald Trump’s Smithian Capitalism

Now, we’re forced to confront glaring contradictions.

The approach taken by Biden and Washington promotes industry through subsidies. Trump, however, advocates for a different path. He prefers import duties over subsidies. He desires income at the border rather than a request for funds from the Treasury. Trump aims to apply pressure on foreign manufacturers, urging domestic producers to innovate under competitive markets rather than linger comfortably in a semi-monopoly backed by public funding.

This perspective is much more aligned with a Smithian approach than many would care to acknowledge.

Smith was against prohibitions, stating they lead to monopolies. He critiqued subsidies for distorting production and incentivizing the wrong behaviors. He defended his approach as a way to boost profits while maintaining competitiveness and fostering industry improvement.

As we mark the 250th anniversary of National Wealth, it’s worth recognizing that Adam Smith endorsed the very policy blend that President Trump is currently advocating.