Adam Smith, Economist of the American Revolution

Editor’s Note: This is an edited version of remarks delivered at the National Museum of Scotland, Edinburgh, for the New Enlightenment Conference sponsored by Panmure House, June 9, 2026. The remarks drew on Samuel Gregg, Economist and Revolutionary: Adam Smith and 1776, AIER papers #19, April 7, 2026. 

It is a pleasure to be with you this evening at the National Museum of Scotland for the New Enlightenment Conference graciously hosted by Adam Smith’s Panmure House. We are gathered to commemorate the publication of a book that changed not only how we think about the world, but which also helped transform it: from one in which poverty was the norm into one in which we understand how to create wealth. 

But alongside Smith’s Inquiry into the Nature and Causes of the Wealth of Nations, 2026 is also the 250th anniversary of the publication of another text that reflected another revolution in the realm of ideas. Like The Wealth of Nations, the Declaration of Independence continues to shape how we think about freedom and self-government. It is difficult not to read these two texts without experiencing something of the spirit of liberty which they embody and imbibe a sense of the casting-off of fetters that had hitherto burdened humanity. Just as Smith brought into being the new social science of economics, the men who signed the Declaration of Independence began the process of bringing into being a republic—more specifically, a commercial republic—which would one day bestride the world. 

Tonight, however, I want to explore an often-overlooked story: that being Adam Smith’s thinking about America’s future and his deep engagement with what eighteenth-century British officials and parliamentarians called “the American crisis.” Smith may have been immersed in the world of ideas, yet he remained a keen student of the unfolding drama between Britain and its North American colonies. Smith’s analysis of the forces driving that conflict, and his bold proposals for resolving it, had genuinely revolutionary implications for the American colonies and Britain and its Empire. Smith’s reflections on the American crisis also have implications for how we think about the role of economics in our world today, marked as it is by left and right populism and the interventionist economics that are integral to their associated political agendas. 

A Mercantilist World 

In the 1760s and 1770s, politicians, pamphleteers, lawyers, and philosophers in Britain and the thirteen North American colonies argued incessantly about rights, taxes, and the British constitution. Smith injected something different into this multitude of voices. As the Glasgow-born economic historian and editor of the Glasgow edition of The Wealth of Nations, the late Andrew Skinner noted, “Smith’s brand of radicalism is distinctive in the sense that he addressed the American question from the standpoint of a political economist.” That perspective allowed Smith to identify some of the subterranean causes driving the division between London and Philadelphia that had eluded others, while also outlining solutions marked by a concern for liberty, an unparalleled grasp of economics, and an under-appreciated realism about international relations. Much of that perspective has something to say to us in our era of renewed protectionism and great-power competition. 

To understand Smith’s contribution, we must understand the economic world which he inhabited. In the eighteenth century, the dominant economic arrangement was what Smith famously called “the mercantile system.” Mercantilism was not a neatly codified doctrine. Nonetheless, its core ideas shaped economic policy throughout the European world. And the European world of the time, we should recall, was one that stretched from St. Petersburg to Philadelphia, Edinburgh to Madras, and Madrid to Buenos Aires. 

This is a world in which rulers generally believed that wealth consisted primarily of the possession of gold and silver bullion. Prosperity, they thought, came from exporting more than you imported. That translated into political leaders supporting the subsidizing of domestic industries, imposing high import tariffs, and granting monopolies to chartered companies. Trade between sovereign states, governments insisted, could not be left to free exchanges between producers and consumers. Instead, it needed a significant degree of state management. If this sounds familiar to you, it should, because it is not particularly different from the economic world in which we presently live. 

In The Wealth of Nations, Smith dissected all these ideas with analytical precision. He called the obsession with the balance of trade “absurd.” When two parties engage in voluntary exchange, Smith showed, both gain—otherwise, the exchange would not occur. Mercantilism’s focus on shoring up producers at consumers’ expense was equally misguided. “Consumption,” Smith underscored, “is the sole end and purpose of all production.” Policies, he stressed, that sacrificed consumers’ interests for those of producers who used their political connections to extract government favors not only led to significant economic inefficiencies; they were also unjust. 

India, Boston, and Taxes 

Nowhere was the mercantilist outlook more evident than in Britain’s Navigation Acts. These laws required certain colonial goods to pass first through British ports, thereby incurring extra costs for merchants. Likewise, many foreign goods bound for America had to be routed through British ports. The result was higher prices for British and colonial consumers as well as restrictions on merchants’ ability to trade with whom they wished. 

In The Wealth of Nations, Smith acknowledged that these arrangements had some benefits. Britain gained a reliable market for its manufactures, while the colonies could export their massive agricultural surpluses to Britain. Mercantilist policies also committed the Royal Navy to securing the trade routes extensively used by Britons and Americans who traded across the Atlantic and throughout the British Empire, especially in the Caribbean. The Royal Navy’s upkeep may have been expensive, but its control of the seas prevented foreign powers, most notably France and Spain, from cutting off the American colonies from Britain—the country which remained their biggest export market. 

Smith, however, went on to warn that the costs of such policies were mounting. Mercantilism’s dysfunctions became painfully visible in the final years before the American Revolution. The fortunes of Britain’s East India Company (EIC) exemplified this.  

Since 1600, the EIC had enjoyed a monopoly on English trade east of the Cape of Good Hope. By the 1770s, the EIC wielded enormous economic and political power, complete with its own armies, and a powerful lobby in Parliament. When it faced financial troubles after wars and famines in India, the EIC did what many businesses then and now do: it lobbied for more favors, privileges, and an edge against any actual or potential competitors. In other words, a classic mercantilist economic enterprise wanted more mercantilist policies to bolster its position. 

The result was the 1773 Tea Act. This gave the EIC a privilege American merchants were not accorded: that of shipping tea directly to America rather than through British ports. Moreover, the tea came with a Parliament-imposed tax on Americans—a tax that Americans maintained only their own colonial assemblies could levy. In short, what began as an economic issue became a flashpoint for the broader political and constitutional conflicts that gave us the Boston Tea Party. 

Long, however, before Massachusetts colonists tipped the EIC’s tea into Boston harbor, Adam Smith had been thinking about the American crisis. His friend David Hume once chided him for letting his absorption in American affairs delay The Wealth of Nation’s publication. “If you wait till the Fate of America be decided,” he told Smith, “you may wait long.” The same fascination on Smith’s part also helps explain why The Wealth of Nation’s last sections are heavily focused on America. 

Advisor on America 

One little known fact about Smith is that, far from being the absent-minded professor who lives in a world of abstraction, he maintained a strong interest in British politics and policy development. Aware of his deep knowledge of fiscal matters, senior British politicians such as Lord Shelburne and Lord Townshend (both of whom would later become prime minister) began asking Smith in the mid-1760s for his advice on taxation given the growing political difficulties around that issue in North America. 

Smith’s core observation in The Wealth of Nations about the American crisis was that as the colonies’ economies matured, Americans would start resenting the limits which mercantilist policies imposed on their economic liberty . The colonies would begin to see mercantilist rules as the “principal badge of their dependency” and a violation of the rights of property and free exchange. There was no doubt in Smith’s mind that “such prohibitions” were “unjust” because they restricted the colonists’ economic freedom to use their resources as they saw fit.  

To this, Smith added another economic insight. Mercantilism, Smith stated, would generate slower growth on both sides of the Atlantic. Britain’s trade, he argued, was being forced into one “great channel” rather than many smaller, more profitable ones. Without liberalizing economic reforms, Smith believed that growing awareness of mercantilism’s economic drawbacks would eventually generate severe political tensions. 

Alongside diagnosing key aspects of the problem, Smith offered ideas about how to resolve the conflicts between Britain and the thirteen colonies. He laid out his thoughts on this matter in The Wealth of Nations, but also in a memorandum he authored in 1778 at the request of the Solicitor-General Alexander Wedderburn, following the devastating British defeat at the Battle of Saratoga. That defeat brought France directly into the war, thereby dramatically reducing Britain’s odds of prevailing over America’s revolutionaries. 

In The Wealth of Nations, Smith advances two radical solutions. The first was a full economic and political union between Britain and the North American colonies that rested on three pillars. The first pillar was the complete freedom of trade throughout the British Empire and the phasing out of mercantilist restrictions. The second was a fiscal consolidation whereby the colonies would share the burden of Britain’s public debt. Finally, Americans had to be given seats in Parliament, since taxation without representation violated British constitutional principles. 

Should these changes occur, Smith projected, there was a real likelihood that, as America’s population and wealth grew, the empire’s epicenter and seat of government would eventually shift across the Atlantic. In other words, economic reality—not sentiment—would determine the focus of the British Empire’s political gravity. 

The second alternative to resolving the American crisis outlined in The Wealth of Nations was for Britain to let the colonies go. Smith was cautious about stating this too overtly, but the message is not hard to detect between the lines. If Britain was unwilling to complete effectively what Smith called the “project of an empire” by investing it with the type of economic, political, and constitutional structures that such an enterprise required, then, Smith stated “it ought to be given up.” 

Central to this proposition was a tough-minded political economy observation on Smith’s part. “If any of the provinces of the British Empire cannot be made to contribute towards the support of the whole empire,” Smith said, “it is surely time that Great Britain should . . . endeavor to accommodate her future views and designs to the real mediocrity of her circumstances.” In short, if it was not possible for the British Parliament to get the American colonies to agree to be taxed and thereby secure a substantial American fiscal contribution to the maintenance of British military forces in the colonies as well as efforts to reduce Britain’s massive public debt, there was little point in Britain having an empire in the first place. 

In his 1778 memorandum, Smith is far more direct in presenting independence as the most economically and politically optimal path forward. In the first place, Smith’s memorandum reiterated his argument in The Wealth of Nations that a political and economic union was, in an ideal world, the best path to lasting peace. By 1778, however, Smith had become skeptical that this was a real option. The enmity the Americans felt towards Britain was simply too great, and British political and popular opinion remained resolutely determined to subdue the rebellious colonists. 

Smith then outlined other ways of ending the war. One was to return to the status quo ante bellum. Smith knew that this was the preference of the prime minister, Lord North. But, Smith stated, this would be unacceptable to American opinion. A second possibility was for Britain to pursue an all-out military conquest of the colonies, followed by the installation of a military government. Unfortunately, Smith warned, this would be ruinously expensive, morally corrosive of British politics, and—again—the Americans were unlikely to ever accept it. 

Yet another possibility, Smith thought, was that the war might end “in the submission of a part, but of a part only, of America” and with “Great Britain, after a long, expensive and ruinous war, being obliged to acknowledge the independency of the rest.” In some senses, this was what transpired when Britain recognized the thirteen colonies’ independence at the Treaty of Paris in 1783 while retaining much of the rest of British North America. 

But the boldest option offered by Smith was for Britain to grant America complete independence. Smith did not relish taking this path. He recognized that it would signal weakness on Britain’s part to the other European powers. Such a move would also generate domestic fury against the government and its parliamentary supporters. 

Still, Smith insisted, Britain had to face reality, but he softened the blow by suggesting that independence need not translate into permanent hostility between Britain and an independent America. Smith argued that the ongoing ties of language, manners, history, religion, and culture would eventually revive the natural affection between America and the mother country. Moreover, a free America, liberated from mercantilist policies, he stated, and open to free trade would likely become a prosperous trading partner for Britain. These factors would, according to Smith, make America a natural British ally. 

Lessons for Our Time 

It took time, but Smith’s predictions about Anglo-American relations were for the most part vindicated. After 1783, relations between Britain and America remained tense, and were only partly resolved by the John Jay Treaty of 1794 that granted America “Most Favored Nation” status for trade with Britain and expanded America’s commercial access to the highly lucrative British West Indies. There was even a war between the two powers in 1812. After the Civil War, America’s protectionist policies led to ongoing conflicts with an aggressively free trade Britain.  

Gradually, however, Britain and America built a relationship that benefited both nations. And it was a relationship that, even today, remains underpinned by strong commercial ties and many of the natural linkages Smith highlighted in 1778. 

What lessons, then, does Smith’s engagement with the American question offer us today? I would like to suggest four. 

The first is that protectionist policies distort our understanding of what is truly the national interest. A major commonality of eighteenth-century mercantilism and contemporary economic nationalism is that while they promise national strength, they deliver cronyism, economy inefficiency, and slower growth. Who, we should ask, really benefits from policies ostensibly designed to protect us? And at whose expense? Smith’s analysis of the economic policies contributing to the American crisis illustrates that the incentives for interest groups to pursue an endless quest for government privileges at everyone else’s expense are part of the human condition. And if the incentives lie in looting the public purse, we should not be surprised that modern-day equivalents of the East India Company emerge and contribute to political discord. 

This brings us to a second lesson: domestic interventionist agendas can generate serious friction in international relations. Smith showed how the domestic effects of mercantilist policies poisoned relations between peoples over time, even between those as closely linked as Britain and its North American colonies.  

Third, international and domestic economic liberalization can help lay foundations for more peaceful relations between sovereign states. To be sure, Smith was no utopian. He did not believe that free trade would generate a Kantian perpetual peace, nor was he a crypto-pacifist. His view of international politics was close to that of David Hume: that conflict and war was part of human affairs and that the best way to minimize its likelihood was for governments to pursue and seek to maintain a balance of power among sovereign-states. Yet, although commerce and free trade may not be a universal elixir to international tensions, let alone war, Smith shows us how mercantilism and its modern equivalents undoubtedly accentuate strife and conflict between nations. 

Fourth, Smith’s exploration of the American crisis shows us how the economic way of thinking pioneered in The Wealth of Nations is one of the great clarifiers of human affairs. Rigorous economic analysis does not reveal to us the truth about everything. Nevertheless, it is indispensable for navigating complex problems that confront business leaders, politicians, and citizens. Smith shows us how to separate out the short-term considerations that invariably, and often necessarily, preoccupy policymakers, from the deeper economic realities that help drive nations’ destinies over the long term. 

In his deliberations on America, Smith relentlessly drew attention to truths like the power of incentives, the reality of unintended consequences, the follies of interventionism, the benefits of competition and economic liberty, and the paradox that individuals pursuing their self-interest in the conditions of economic freedom tend to promote what the U.S. Constitution calls the general welfare. Smith’s focus on these factors revealed truths about reality that people in his time had missed, and of which too many people in our time prefer to remain ignorant.  

In this sense, Smith was both an economist and a revolutionary. He not only initiated what we today understand to be economics: he applied the new economic reasoning to illuminate one of the greatest political questions of his age. In doing so, moreover, Smith showed us that economic liberty is neither a peripheral concern nor a policy luxury. It is in fact central to improvement, to the constitutional health of nations, and better relations between countries. The Wealth of Nations challenges us to imagine societies rooted in consent, commerce, and what Smith called the system of natural liberty rather than dominated by coercion and privileges provided to special interests. 

Certainly, Smith was deeply realistic about the prospects of realizing such things in a world that will always be imperfect. But in our own time of uncertainty, Smith’s cool, analytical voice comes to us from across time to remind us that clear-eyed economic thinking remains one of humanity’s most powerful instruments for understanding our problems and advancing our possibilities for improvement. We ignore that wisdom at our peril. 

Samuel Gregg is the President and Friedrich Hayek Chair in Economics and Economic History at the American Institute for Economic Research.