The chapter Of Bounties from Adam Smith’s The Wealth of Nations offers a sharp critique of the export subsidy system adopted by Britain in the 18th century. Bounties, or state financial incentives to encourage the export of domestic goods, are analyzed by Smith within the context of trade balance and economic efficiency. According to him, such policies are not only theoretically flawed but also counterproductive in the long run. Rather than enriching the nation, bounties become a structural burden that distorts the natural order of trade.
Smith recognized that policymakers of the time adhered to the spirit of mercantilism, which held that a positive trade balance more exports than imports was the foundation of national wealth. Within this framework, exports aided by bounties were believed to boost foreign reserves and generate collective prosperity. However, Smith radically challenged this assumption. He showed that subsidizing products that could not compete without government aid was a form of intervention that weakened efficiency and fair competition.
This article explores each section of the Of Bounties chapter in greater depth, examining Smith’s critique of the economic logic behind bounties, their impact on domestic and international markets, and their broader socio-political implications. From the corn trade to the herring industry, Smith exposes the illusion of prosperity built on subsidy policies. Each point remains relevant not only in 18th-century Britain but also echoes through contemporary economic policy debates around the world.
We will dissect Adam Smith’s core arguments critically and systematically not only to understand the legacy of classical economic thought but also to assess its relevance in today’s global economic challenges. Let us begin with the underlying logic of the bounty policy, which was supposedly designed to create export advantages.
The Logic of Bounties and the Delusion of Trade Balance
One of the most fundamental arguments supporting bounties is that export incentives can strengthen a country’s trade balance. In the mercantilist framework, exports symbolize wealth, while imports represent economic leakage. Smith, with his sharp logic, deconstructed this system as merely an illusion of prosperity. Giving money to merchants so they could sell goods abroad, he argued, was not a development strategy but a misdirected form of cross-subsidy.
If a good could only be exported with government support, it indicated a lack of comparative advantage in the global market. Therefore, state funds were being used not to strengthen the national industry, but to cover up inefficiencies that should instead signal a need to reallocate resources to more productive sectors. This policy sustained the appearance of trade success while actually maintaining economically unsound transactions.
Smith further criticized the idea that export subsidies would grow national wealth. The profits from such exports once offset by bounties were merely wealth redistributed from taxpayers to exporters. No new value was created; it was just an unproductive wealth transfer. It was a mere accounting illusion.
This illusion also entrenched dependency in certain sectors. Producers who relied on bounties had no incentive to innovate or become efficient. Smith bluntly stated that any trade relying on bounties was inherently a losing trade. If all trade functioned this way, national capital would be eroded by unsustainable practices.
The long-term implications were grave. If such policies were widely applied, the state would drain its own resources to finance unproductive sectors. Instead of strengthening the national economy, bounties would weaken competitiveness and burden the public through higher taxes and rising prices.
Bounties and Domestic Price Distortion
One of the most direct consequences of bounty policies is the rise in domestic prices. This results from diverting a portion of domestic supply to foreign markets due to financial incentives. Smith noted that when bounties were granted for corn exports, the best quality corn which could have supplied local markets was instead shipped abroad for higher profits. Consequently, local supply shrank, and prices rose.
Smith argued that this created a double distortion. First, domestic consumers had to compete with foreign buyers who were essentially subsidized by taxpayers. Second, reduced supply led to inflation not because of higher production costs or better quality, but due to artificial scarcity.
Citizens ended up paying twice: once through taxes to fund the bounties, and again through inflated market prices. This economic irony meant the public paid more just so producers could sell abroad at cheaper prices. Essentially, public funds were used to make life more expensive for the public.
The long-term impact of such price distortion was complex. When the price of essentials like corn rose, low-income groups suffered most. To maintain purchasing power, wages had to rise, but this burdened businesses and curtailed productive economic growth. Thus, the economy entered a vicious cycle: wages rose because prices rose, prices rose because supply shrank, and supply shrank due to subsidized exports.
Smith warned that nominal increases in wages or prices were not indicators of prosperity. If 4 shillings bought less than 3 shillings previously, society was not richer it was stuck in a numerical illusion while real purchasing power declined. Bounties thus undermined price mechanisms and entrenched structural inequality.
Herring Subsidies and Policy Irony in the Fishing Industry
In this section, Smith turned to a specific example: the bounty for the herring fishing industry. The government gave 30 shillings per ton to fishing vessels, ostensibly to boost productivity and maintain a pool of seamen for national defense. However, Smith questioned the effectiveness of this policy, calling it an exercise in government foolishness.
Ironically, ships were chasing bounties, not fish. In years when catches were poor, fleets still sailed because subsidies were guaranteed. Smith viewed this as resource and capital waste: unproductive fishers were rewarded, while fair competition was undermined since success no longer determined income.
Smith further revealed that the state paid more per barrel in subsidies than the market price of the fish. Subsidies could cost over one pound per barrel, even though market value was less than two pounds. Thus, an industry meant to generate revenue became a fiscal drain, offering no real value in return.
The impact wasn’t just financial. The bounty system disrupted traditional small-scale fishing practices, especially in regions like Scotland. Small boats that didn’t qualify for subsidies were pushed out of the market, depriving local communities of livelihoods. Meanwhile, larger vessels inefficient without aid offered little economic benefit.
Smith did not deny that certain strategic industries might warrant support. However, he stressed that such incentives must be performance-based. Giving bounties without requiring results was akin to paying people not to work. In the case of herring, bounties weakened both policy logic and public accountability.
Bounties and the Devaluation of Money and Domestic Commodities
Smith also highlighted the monetary effects of bounties. They did not increase the real value of exported goods but reduced the real value of money used to trade them. For example, as corn prices rose due to export incentives, prices of other goods followed suit since corn was a benchmark for domestic currency valuation.
This didn’t lead to real prosperity for farmers or landlords. While they might receive more for their corn or rent, the purchasing power of that income declined. Real gains were illusory. Inflation crept in unnoticed.
Since corn prices influenced labor costs, higher corn prices pushed up wages. But that triggered cost inflation across other sectors, including manufacturing. Ironically, the state’s attempt to “support” citizens via bounties led to economic stagnation and inequality.
Moreover, rising domestic costs hurt international competitiveness. As input and wage costs increased, British goods became more expensive abroad. Meanwhile, rival countries without bounties could sell cheaper goods or even import subsidized British corn turning export policies into self-defeating tools.
Smith compared this scenario to Spain and Portugal, where wealth in precious metals did not prevent economic decline. He argued that wealth depended not on how much money a nation had, but on how wisely it used it. In this case, bounties wasted money on unviable sectors, degrading national economic quality
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Export Markets and the Inverse Effects on Farmers and Workers
Supporters of bounties often claimed that access to export markets would expand demand and raise incomes for farmers and laborers. But Smith refuted this. If export markets only existed thanks to bounties, they were artificial falsely inflating demand and undermining natural balance between production and consumption.
Each exported bushel of corn meant less supply at home, driving up domestic prices. Workers suffered first as food costs rose. Without proportionate wage increases, purchasing power declined, threatening well-being.
For farmers, higher prices seemed beneficial. But Smith pointed out these were not results of improved efficiency, but of policy manipulation. When high prices stem from subsidies, farmers become dependent on external aid, not on real market strength.
This created structural dependency. Farmers relied on bounties to stay afloat, workers bore rising living costs, and other industries had to adjust wage structures. The entire economy buckled under price distortions rippling through all sectors. Exports, meant as solutions, became root causes of imbalance.
Smith insisted that free markets would reveal whether a product was competitive. If it couldn’t be sold abroad without help, that was a signal to change direction. Ignoring such signals by offering bounties was not only inefficient, but unjust it enriched a few at the expense of many.
Economic Irony and Hidden Monopolies within Bounty Systems
Behind the pro-industry narrative of bounties lay a deep paradox: policies supposedly promoting competition and national production actually fostered hidden monopolies. Smith revealed how bounties sheltered uncompetitive firms. Those receiving ongoing aid had no incentive to innovate or become efficient, as guaranteed profits replaced market risk.
In effect, the state transferred business risk from producers to taxpayers. Normally, the market punishes inefficiency, but bounties rewarded it creating a monopoly-like system where certain players enjoyed exclusive access to subsidized markets.
Smith noted that the main beneficiaries weren’t small farmers or workers, but large traders and exporters those best positioned to exploit the system. Some even formed associations or informal cartels to pressure governments into preserving bounty schemes under the guise of price stability and supply management.
This irony worsened market distortion. In a normal setting, capital and labor flow to productive sectors. But with bounties, unviable sectors were artificially sustained. National resources were wasted, and economic stagnation followed.
Smith concluded that bounties created covert monopolies more dangerous than legal ones. Unlike formal monopolies, which could be legally challenged, these were protected by patriotic and populist narratives. Hence, Smith viewed bounties as not only economically wrong but morally corrupt public policy.
Bounties and the Sacrifice of National Fiscal Balance
Smith was deeply concerned about the fiscal consequences of bounties. These policies not only distorted markets but also drained public funds that could have supported infrastructure, education, or defense. Instead, inefficient industries were propped up to maintain an illusion of national competitiveness.
Bounties were rarely evaluated for cost-effectiveness. Governments often assumed that more exports were automatically beneficial ignoring the cost of achieving those exports. In the case of corn, subsidies sometimes cost more than the export’s total value. This was fiscal inefficiency that hurt the nation twice: financially and economically.
Ironically, the burden was not felt by industry beneficiaries. They profited from public funds, while citizens who did not benefit from the exports still had to pay the taxes funding them. Smith saw this as fiscal injustice, where benefits and burdens were distributed unequally, weakening trust in government.
Smith compared bounty spending to building a grand house on a landslide: it may look impressive, but the foundation is unstable. When crises arise, such policies become liabilities that accelerate financial collapse.
For Smith, bounties were not strategic investments, but wasteful public spending wrapped in nationalist rhetoric. A sound tax system should support common needs not cover the failures of industries that cannot stand on their own.
A More Rational Alternative: Free Production and Open Competition
Smith was not just adept at identifying bad policies he also proposed rational alternatives. In rejecting bounties, he advocated for free production and open competition. In this system, only producers who met market needs without subsidies would survive. Competence and efficiency became the rules of economic natural selection.
He argued that open competition spurred innovation. Without safety nets, businesses would improve efficiency, reduce costs, and enhance product quality. This created a positive cycle of value-driven production. Real market strength lay not in protection, but in continuous adaptation and evolution.
Free production also rebalanced domestic and export markets. If a product was competitive, it would sell abroad without bounties. If not, that signaled a need to shift resources to more productive sectors. The economy, thus, stayed dynamic and responsive to real demand.
There was also a moral dimension. Free markets freed citizens from paying for inefficient industries. People paid only for what they consumed no hidden “taxes” via inflated prices. For Smith, this was distributive justice: letting markets determine value, not governments.
Smith acknowledged that liberalization carried risks, but believed they were smaller than the systemic damage caused by interventions like bounties. Open competition, in the long run, would build not just a healthier market but a more independent, productive, and fair society.
The Legacy of Smith’s Thought in Modern Economic Policy
Smith’s insights in Of Bounties remain a living intellectual legacy, not just critiques of 18th-century Britain. In today’s world still rife with export subsidies, protectionism, and fiscal crutches for declining industries Smith’s message rings true: economic policy must be rooted in market rationality and distributive fairness.
In many developing countries, bounties reappear as fiscal incentives or tax holidays. Governments hope these will trigger economic growth. Yet as Smith warned, such effects rarely last. When the incentives stop, so do the industries proving the foundations were artificial.
Conversely, globalization has rewarded countries focused on real competitiveness. Many Asian nations weathered economic crises better by building efficient industries without heavy reliance on subsidies. They embodied Smith’s idea: economic strength lies in innovation and productive structures, not government aid.
The chapter’s main lesson is restraint. Governments should resist short-term temptations that block long-term competitiveness. Smith urged faith in freedom and legal protections: a system where empowered citizens build sustainable economies. This remains both classical economic truth and ethical governance principle.
Ultimately, Of Bounties reminds us that well-meaning policies can carry destructive consequences. It is not just a treatise on economics, but a moral reflection on policymaking. If we still ask how to build a fair and efficient economy, Smith already gave the answer: let markets work, and let governments uphold freedom and integrity.
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