An Inquiry into the Nature and
Causes of the Wealth of Nations (generally referred
to by the short title The Wealth of
Nations) is the magnum
opus written by Scottish
economist
and moral philosopher Adam Smith and was
first published in 1776. It is an
account of
economics at the dawn of the
Industrial Revolution, as well
as a rhetorical piece written for the generally educated individual
of the 18th century - advocating a free market economy as more
productive and more beneficial to society.
Themes
One of the book's main themes is the concept of an
invisible hand that naturally guides a
society through self-interest.
In
The Wealth of Nations, Smith writes:
This phrase, often quoted and alluded to, conveys the unintentional
consequences derived from individuals pursuing their own wants and
needs.
Where free markets are concerned, the idea of an invisible
"governing" hand lends itself to the concept that unregulated
markets will naturally lead towards equilibrium.
History
The Wealth of Nations was first published on March 9,
1776, during the
British
Agricultural Revolution. It influenced not only authors and
economists, but governments and organizations. For example,
Alexander Hamilton was influenced
in part by
The Wealth of Nations to write his
Report on Manufactures, in which
he argued against many of Smith's policies. Interestingly, Hamilton
based much of this report on the ideas of
Jean-Baptiste Colbert, and it was, in
part, to Colbert's ideas that Smith wished to respond with
The
Wealth of Nations.
Many other authors were influenced by the book and used it as a
starting point in their own work, including
Jean-Baptiste Say,
David Ricardo,
Thomas Malthus and, later,
Karl Marx and
Ludwig
von Mises. The Russian national poet
Aleksandr Pushkin refers to
The Wealth
of Nations in his 1833 verse-novel
Eugene Onegin.
Irrespective of historical influence, however,
The Wealth of
Nations represented a clear leap forward in the field of
economics, similar to Sir
Isaac
Newton's
Principia
Mathematica for
physics or
Antoine Lavoisier's
Traité Élémentaire
de Chimie for
chemistry.
Publishing history
Five editions of
The Wealth of Nations were published
during Smith's lifetime: in 1776, 1778, 1784, 1786, and 1789.
Numerous editions appeared after Smith's death in 1790. To better
understand the evolution of the work under Smith's hand, a team led
by
Edwin Cannan collated the first five
editions. The differences were published along with an edited fifth
edition in 1904. They found minor but numerous differences
(including the addition of many footnotes) between the first and
the second editions, both of which were published in two volumes.
The differences between the second and third editions, however, are
major: In 1784, Smith annexed these first two editions with the
publication of
Additions and Corrections to the First and
Second Editions of Dr. Adam Smith’s Inquiry into the Nature and
Causes of the Wealth of Nations, and he also had published the
now three volume third edition of the
Wealth of Nations
which incorporated
Additions and Corrections and, for the
first time, an index. Among other things, the
Additions and
Corrections included entirely new sections. The fourth edition
published in 1786 had only slight differences with the third
edition, and Smith himself says in the
Advertisement at
the beginning of the book, "I have made no alterations of any
kind." Finally, Cannan notes only trivial differences between the
fourth and fifth editions — a set of misprints being removed
from the fourth, and a different set of misprints being
introduced.
Anachronisms and terminology
Some commentary on the work suffers from
anachronism - imposition of modern context and
political contests on a two hundred and fifty year old work.
The book is written in the
English of
the late 1700s, so there are some points to consider:
- The term economics was not
yet in use.
- The term capitalism was not
yet in use. Smith talks about a "system of perfect liberty" or
"system of natural liberty".
- To a certain extent, some form of feudalism was still dominant in parts of
Europe.
- The term corporation, as in feudal corporations, referred to
a body that regulated and, in Smith's portrayal, limited
participation in a skilled trade.
Synopsis
Book I: Of the Causes of Improvement...
Of the Division of
Labour:Smith states that "the greatest improvement in
the productive powers of labour, and the greater part of the skill,
dexterity, and judgment with which it is anywhere directed, or
applied, seem to have been the effects of the division of labour."
To illustrate this, he describes the extensive division of labour
within the "trifling" industry of pin manufacture, along with the
astounding resultant productivity, and labourers' dexterity; then
levers this as an introductory microcosm of the greater, yet less
obvious division of labour in the broader economy. The advantages
of this division were likely the driving force behind
diversification of the trades and industry, and this
diversification was greatest for nations with more industry and
improvement. Agriculture is differentiated from industry for its
comparative lack of division of labour, and the attendant lack of
improved productivity; hence, while poor nations could not compete
with rich nations in manufactures, they could compete in
agriculture.
Smith lists three causes, arising from division, of improved
productivity:
- the labourer's dexterity - due to specializing, year-round, in
a specific task
- time not wasted passing from one task to the next - as in
agriculture - as well as the more consistent and focused effort
when working in just one area
- the machines and tools that have evolved in conjunction with
increasingly specialized labour.
Of the Principle which gives Occasion to the Division of
Labour:Chapter 2 illustrates the growth in
division of labour. Smith hypothesizes
that early societies benefited from specialization in a natural and
spontaneous way - that one person may focus on hunting while
another concentrates on bow-making.
That the Division of Labour is Limited by the Extent of the
Market:Chapter 3 deals with limitations on
division of labour. Smith illustrates
with real world examples of how the extent of market determines the
level of division of labour and the resulting productivity
improvements; it is the extent of the market that determines the
degree to which division of labour can survive - in a limited
market, the liability of specialization out weigh the benefits of
greater productivity.
Of the Origin and Use of Money:When money was
first invented, it was not well regulated, which made agriculture
and commodities very difficult between individual owners.
Of the Real and
Nominal Price of Commodities, or of their Price in Labour, and their Price in
Money:Smith begins by setting out the source of a
commodity's value. He states,
This is known as the
labour
theory of value, a defining feature of classical
political economy. Smith then
distinguishes between the nominal value of a commodity (in money
denomination) and its
real
value in the labour required to purchase it. According to
Smith, while the nominal value of a commodity is subject to
fluctuation, this does not change its real value, because the
amount of labour required to produce it and bring it to the market
remains constant.
For example, the price of a commodity redeemable in silver may be
1:1, as the amount of labour required to produce that commodity is
the same as the amount of labour required to retrieve one piece of
silver. However, with the discovery of new silver mines in North
America, a surge in the supply of silver in the economy may bring
the nominal price of the commodity in silver to 1:2. Yet this does
not affect the commodity's real value, because the abundance of
silver in the newly discovered mines does not suppose a lesser
degree of labour required to retrieve them, but simply a greater
availability of silver in the market. It is this greater
availability that accounts for the deflation of the price; while
the commodity is worth just as much labour now as it was before, it
will not command as much power in the economy as before. However,
if the price were to rise to 1:2 as a result of technological
improvements in the manufacture or transport of the commodity, this
would constitute a decline in its real value, because less labour
is necessary to produce and market it.
Of the Component Parts of the Price of
Commodities: Smith argues that the price of any product
reflects wages, rent of land and "profit of stock," which
compensates the capitalist for risking his resources.
Of the Natural and Market Price of
Commodities:
To paraphrase Smith, and the first part of this Chapter, when
demand exceeds supply, the price goes up. When the supply exceeds
demand, the price goes down.
He then goes on to comment on the different avenues that people can
take to generate a larger profit than normal. Some of those
include: finding a commodity that few others have that allows for a
high profit, and being able to keep that secret; Finding a way to
produce a unique commodity (The dyer who discovers a unique dye).
He also states that the former usually has a short lifespan of high
profitability, and the latter has a longer. He also notes that a
monopoly is essentially the same as the dyers trade secret, and can
thus lead to high profitability for a long time by keeping the
supply below the effectual demand.
Of the Wages of Labour: In this section, Smith
describes how the wages of labour are dictated primarily by the
competition among labourers and masters. When labourers bid against
one another for limited opportunities for employment, the wages of
labour collectively fall, whereas when employers compete against
one another for limited supplies of labour, the wages of labour
collectively rise. However, this process of competition is often
circumvented by
combinations among
labourers and among masters. When labourers combine and no
longer bid against one another, their wages rise, whereas when
masters combine, wages fall. In Smith's day, it should be noted,
organized labour was dealt with very harshly by the law.
Smith himself wrote about the "severity" of such laws against
worker actions, and made a point to contrast the "clamour" of the
"masters" against workersassociations, while associations and
collusions of the masters "are never heard by the people" though
such actions are "always" and "everywhere" taking place:
"We rarely hear, it has been said, of the combinations
of
masters, though frequently of those of workmen. But whoever
imagines,upon this account, that masters rarely combine, is as
ignorant of the world as of thesubject. Masters are always and
everywhere in a sort of tacit, butconstant and uniform,
combination, not to raise the wages of labourabove their actual
rate...Masters, too, sometimes enter intoparticular combinations to
sink the wages of labour even below thisrate. These are always
conducted with the utmost silence and secrecytill the moment of
execution; and when the workmen yield, as theysometimes do without
resistance, though severely felt by them, theyare never heard of by
other people" In contrast, when workers combine,"the masters..never
cease to call aloud for the assistance of thecivil magistrate, and
the rigorous execution of those laws which havebeen enacted with so
much severity against the combination ofservants, labourers, and
journeymen."
In societies where the amount of labour is in abundance to the
amount of revenue which may be used to pay for waged labour, the
competition among workers is greater than the competition among
masters, and wages fall; inversely, where excess revenue is in
abundance, the wages of labour rise. Smith argues that, therefore,
the wages of labour only rise as a result of greater revenue
disposed to pay for labour. Labour is the same as any other
commodity in this respect thought Smith,
However, the amount of revenue must be increasing constantly in
proportion to the amount of labour in order for wages to remain
high. Smith illustrates this by juxtaposing England with the North
American colonies. In England, there is certainly a greater amount
of revenue than in the colonies; however, the wages of labour are
lower, because more workers would flock to new employment
opportunities to which the large amount of revenue gives occasion,
eventually competing against each other as much as they did before.
By contrast, as capital continues to be introduced to the colonial
economies at least at the same rate that population increases to
"fill out" this excess capital, the wages of labour there are kept
much higher than in England.
Smith was highly concerned about the problems of poverty. He
writes,
The only way to determine whether a man is rich or poor is to
examine the amount of labour he can afford to purchase."Labour is
the real exchange for commodities".
Smith also describes the relation of cheap years and the production
of manufactures versus the production in dear years. He argues that
while some examples such as the linen production in France shows a
correlation, another example in Scotland shows the opposite. He
concludes that there are too many variables to make any statement
about this.
Of the Profits of Stock: In this chapter, Smith
uses
interest rates as an indicator
of the profits of
stock. This is
because interest can only be paid with the profits of stock, and so
creditors will be able to raise rates in proportion to the increase
or decrease of the profits of their debtors.
Smith argues that the profits of stock are inversely proportional
to the wages of labor, because as more money is spent compensating
labor, there is less remaining for personal profit. It follows
that, in societies where competition among laborers is greatest
relative to competition among employers, profits will be much
higher. Smith illustrates this by comparing interest rates in
England and Scotland. In England, government laws against
usury had kept maximum interest rates very low, but
even the maximum rate was believed to be higher than the rate at
which money was usually lended. In Scotland, however, interest
rates are much higher. This is the result of a greater proportion
of capitalists in England, which offsets some competition among
laborers and raises wages.
However, Smith notes that, curiously, interest rates in the
colonies are also remarkably high (recall that, in the previous
chapter, Smith described how wages in the colonies are higher than
in England). Smith attributes this to the fact that, when an empire
takes control of a colony, prices for a huge abundance of land and
resources are extremely cheap. This allows capitalists to increase
his profit, but simultaneously draws many capitalists to the
colonies, increasing the wages of labor. As this is done, however,
the profits of stock in the mother country rise (or at least cease
to fall), as much of it has already flocked offshore.
Of Wages and Profit in the Different Employments of Labour
and Stock: Smith repeatedly attacks groups of politically
aligned individuals who attempt to use their collective influence
to manipulate the government into doing their bidding. At the time,
these were referred to as "factions," but are now more commonly
called "special interests," a term which can comprise international
bankers, corporate conglomerations, outright oligopolies, trade
unions and other groups. Indeed, Smith had a particular distrust of
the tradesman class. He felt that the members of this class,
especially acting together within the
guilds
they want to form, could constitute a power block and manipulate
the state into regulating for
special
interests against the general interest:
Smith also argues against government
subsidies of certain trades, because this will
draw many more people to the trade than what would otherwise be
normal, collectively lowering their wages.
Chapter 10, part ii, motivates an understanding of the idea of
feudalism.
Of the Rent of the Land: Rent, considered as the
price paid for the use of land, is naturally the highest which the
tenant can afford to pay in the actual circumstances of the land.
In adjusting the terms of the lease, the landlord endeavours to
leave him no greater share of the produce than what is sufficient
to keep up the stock from which he furnishes the seed, pays the
labour, and purchases and maintains the cattle and other
instruments of husbandry, together with the ordinary profits of
farming stock in the neighbourhood. This is evidently the smallest
share with which the tenant can content himself without being a
loser, and the landlord seldom means to leave him any more.
Whatever part of the produce, or, what is the same thing, whatever
part of its price, is over and above this share, he naturally
endeavours to reserve to himself as the rent of his land, which is
evidently the highest the tenant can afford to pay in the actual
circumstances of the land. Sometimes, indeed, the liberality, more
frequently the ignorance, of the landlord, makes him accept of
somewhat less than this portion; and sometimes too, though more
rarely, the ignorance of the tenant makes him undertake to pay
somewhat more, or to content himself with somewhat less, than the
ordinary profits of farming stock in the neighbourhood. This
portion, however, may still be considered as the natural rent of
land, or the rent for which it is naturally meant that land should
for the most part be let.
Book II: Of the Nature, Accumulation, and Employment of
Stock
Of the Division of Stock: When the stock which a
man possesses is no more than sufficient to maintain him for a few
days or a few weeks, he seldom thinks of deriving any revenue from
it. He consumes it as sparingly as he can, and endeavours by his
labour to acquire something which may supply its place before it be
consumed altogether. His revenue is, in this case, derived from his
labour only. This is the state of the greater part of the labouring
poor in all countries.
II.1.1
But when he possesses stock sufficient to maintain him for months
or years, he naturally endeavours to derive a revenue from the
greater part of it; reserving only so much for his immediate
consumption as may maintain him till this revenue begins to come
in. His whole stock, therefore, is distinguished into two parts.
That part which, he expects, is to afford him this revenue, is
called his capital.
Of Money Considered as a particular Branch of the General
Stock of the Society...: From references of the first
book, that the price of the greater part of commodities resolves
itself into three parts, of which one pays the wages of the labour,
another the profits of the stock, and a third the rent of the land
which had been employed in producing and bringing them to market:
that there are, indeed, some commodities of which the price is made
up of two of those parts only, the wages of labour, and the profits
of stock: and a very few in which it consists altogether in one,
the wages of labour: but that the price of every commodity
necessarily resolves itself into some one, or other, or all of
these three parts; every part of it which goes neither to rent nor
to wages, being necessarily profit to somebody.
Of the Accumulation of
Capital, or of Productive and Unproductive Labour:
There is one sort of labour which adds to the value of the subject
upon which it is bestowed: there is another which has no such
effect. The former, as it produces a value, may be called
productive; the latter, unproductive labour. Thus the labour of a
manufacturer adds, generally, to the value of the materials which
he works upon, that of his own maintenance, and of his master's
profit. The labour of a menial servant, on the contrary, adds to
the value of nothing.
Of Stock Lent at Interest: The stock which is lent
at interest is always considered as a capital by the lender. He
expects that in due time it is to be restored to him, and that in
the meantime the borrower is to pay him a certain annual rent for
the use of it. The borrower may use it either as a capital, or as a
stock reserved for immediate consumption. If he uses it as a
capital, he employs it in the maintenance of productive labourers,
who reproduce the value with a profit. He can, in this case, both
restore the capital and pay the interest without alienating or
encroaching upon any other source of revenue. If he uses it as a
stock reserved for immediate consumption, he acts the part of a
prodigal, and dissipates in the maintenance of the idle what was
destined for the support of the industrious. He can, in this case,
neither restore the capital nor pay the interest without either
alienating or encroaching upon some other source of revenue, such
as the property or the rent of land.
The stock which is lent at interest is, no doubt, occasionally
employed in both these ways, but in the former much more frequently
than in the latter.
Book III: Of the different Progress of Opulence in different
Nations
Of the Natural Progress of Opulence: The great
commerce of every civilized society is that carried on between the
inhabitants of the town and those of the country. It consists in
the exchange of crude for manufactured produce, either immediately,
or by the intervention of money, or of some sort of paper which
represents money. The country supplies the town with the means of
subsistence and the materials of manufacture. The town repays this
supply by sending back a part of the manufactured produce to the
inhabitants of the country. The town, in which there neither is nor
can be any reproduction of substances, may very properly be said to
gain its whole wealth and subsistence from the country. We must
not, however, upon this account, imagine that the gain of the town
is the loss of the country. The gains of both are mutual and
reciprocal, and the division of labour is in this, as in all other
cases, advantageous to all the different persons employed in the
various occupations into which it is subdivided.
Of the Discouragement of Agriculture...: Chapter
2's long title is "Of the Discouragement of Agriculture in the
Ancient State of Europe after the Fall of the Roman Empire".When
the German and Scythian nations overran the western provinces of
the Roman empire, the confusions which followed so great a
revolution lasted for several centuries. The rapine and violence
which the barbarians exercised against the ancient inhabitants
interrupted the commerce between the towns and the country. The
towns were deserted, and the country was left uncultivated, and the
western provinces of Europe, which had enjoyed a considerable
degree of opulence under the Roman empire, sunk into the lowest
state of poverty and barbarism. During the continuance of those
confusions, the chiefs and principal leaders of those nations
acquired or usurped to themselves the greater part of the lands of
those countries. A great part of them was uncultivated; but no part
of them, whether cultivated or uncultivated, was left without a
proprietor. All of them were engrossed, and the greater part by a
few great proprietors.
This original engrossing of uncultivated lands, though a great,
might have been but a transitory evil. They might soon have been
divided again, and broke into small parcels either by succession or
by alienation. The law of
primogeniture hindered them from being divided
by succession: the introduction of entails prevented their being
broke into small parcels by alienation.
Of the Rise and Progress of Cities and Towns, after the
Fall of the Roman Empire: The inhabitants of cities and
towns were, after the fall of the Roman empire, not more favoured
than those of the country. They consisted, indeed, of a very
different order of people from the first inhabitants of the ancient
republics of Greece and Italy. These last were composed chiefly of
the proprietors of lands, among whom the public territory was
originally divided, and who found it convenient to build their
houses in the neighbourhood of one another, and to surround them
with a wall, for the sake of common defence. After the fall of the
Roman empire, on the contrary, the proprietors of land seem
generally to have lived in fortified castles on their own estates,
and in the midst of their own tenants and dependants. The towns
were chiefly inhabited by tradesmen and mechanics, who seem in
those days to have been of servile, or very nearly of servile
condition. The privileges which we find granted by ancient charters
to the inhabitants of some of the principal towns in Europe
sufficiently show what they were before those grants. The people to
whom it is granted as a privilege that they might give away their
own daughters in marriage without the consent of their lord, that
upon their death their own children, and not their lord, should
succeed to their goods, and that they might dispose of their own
effects by will, must, before those grants, have been either
altogether or very nearly in the same state of villanage with the
occupiers of land in the country
How the Commerce of the Towns Contributed to the
Improvement of the Country: Smith often harshly criticised
those who act purely out of self-interest and greed, and warns
that, "[a]ll for ourselves, and nothing for other people, seems, in
every age of the world, to have been the vile maxim of the masters
of mankind." (Book 3, Chapter 4)
Book IV: Of Systems of political Economy
Smith vigorously attacked the antiquated government restrictions
which he thought were
hindering industrial
expansion. In fact, he attacked most forms of government
interference in the economic process, including
tariffs, arguing that this creates inefficiency and
high prices in the long run. It is believed that this theory
influenced government legislation in later years, especially during
the 19th century. (However this was not an
anarchistic opposition to government. Smith
advocated a Government that was active in sectors other than the
economy: he advocated public education of poor adults;
institutional systems that were not profitable for private
industries; a judiciary; and a standing army.)
Of the Principle of the Commercial or Mercantile System: The book has
sometimes been described as a critique of
mercantilism and a synthesis of the emerging
economic thinking of Smith's time. Specifically,
The Wealth of
Nations attacks,
inter alia, two major tenets of
mercantilism:
- The idea that protectionist
tariffs serve the economic interests of a
nation (or indeed any purpose whatsoever) and
- The idea that large reserves of gold
bullion or other precious metals are necessary for a country's
economic success. This critique of mercantilism was later used by
David Ricardo when he laid out his
Theory of Comparative
Advantage.
Of Restraints upon the Importation...: Chapter 2's full title is
"Of Restraints upon the Importation from Foreign Countries of such
Goods as can be Produced at Home". The "
Invisible Hand" is a frequently referenced
theme from the book, although it is specifically mentioned only
once.
Of the extraordinary Restraints...: Chapter 3's
long title is "Of the extraordinary Restraints upon the Importation
of Goods of almost all Kinds, from those Countries with which the
Balance is supposed to be Disadvantageous".
Of Drawbacks: Merchants and manufacturers are not
contented with the monopoly of the home market, but desire likewise
the most extensive foreign sale for their goods. Their country has
no jurisdiction in foreign nations, and therefore can seldom
procure them any monopoly there. They are generally obliged,
therefore, to content themselves with petitioning for certain
encouragements to exportation.
Of these encouragements what are called Drawbacks seem to be the
most reasonable. To allow the merchant to draw back upon
exportation, either the whole or a part of whatever excise or
inland duty is imposed upon domestic industry, can never occasion
the exportation of a greater quantity of goods than what would have
been exported had no duty been imposed. Such encouragements do not
tend to turn towards any particular employment a greater share of
the capital of the country than what would go to that employment of
its own accord, but only to hinder the duty from driving away any
part of that shares to other employments.
Of Bounties: Bounties upon exportation are, in
Great Britain, frequently petitioned for, and sometimes granted to
the produce of particular branches of domestic industry. By means
of them our merchants and manufacturers, it is pretended, will be
enabled to sell their goods as cheap, or cheaper than their rivals
in the foreign market. A greater quantity, it is said, will thus be
exported, and the balance of trade consequently turned more in
favour of our own country. We cannot give our workmen a monopoly in
the foreign as we have done in the home market. We cannot force
foreigners to buy their goods as we have done our own countrymen.
The next best expedient, it has been thought, therefore, is to pay
them for buying. It is in this manner that the mercantile system
proposes to enrich the whole country, and to put money into all our
pockets by means of the balance of trade
Of Treaties of Commerce: When a nation binds
itself by treaty either to permit the entry of certain goods from
one foreign country which it prohibits from all others, or to
exempt the goods of one country from duties to which it subjects
those of all others, the country, or at least the merchants and
manufacturers of the country, whose commerce is so favoured, must
necessarily derive great advantage from the treaty. Those merchants
and manufacturers enjoy a sort of monopoly in the country which is
so indulgent to them. That country becomes a market both more
extensive and more advantageous for their goods: more extensive,
because the goods of other nations being either excluded or
subjected to heavier duties, it takes off a greater quantity of
theirs: more advantageous, because the merchants of the favoured
country, enjoying a sort of monopoly there, will often sell their
goods for a better price than if exposed to the free competition of
all other nations.
Such treaties, however, though they may be advantageous to the
merchants and manufacturers of the favoured, are necessarily
disadvantageous to those of the favouring country. A monopoly is
thus granted against them to a foreign nation; and they must
frequently buy the foreign goods they have occasion for dearer than
if the free competition of other nations was admitted.
Of Colonies:
Of the Motives for establishing new
Colonies: The interest which occasioned the first
settlement of the different European colonies in America and the
West Indies was not altogether so plain and distinct as that which
directed the establishment of those of ancient Greece and
Rome.
All the different states of ancient Greece possessed, each of them,
but a very small territory, and when the people in any one of them
multiplied beyond what that territory could easily maintain, a part
of them were sent in quest of a new habitation in some remote and
distant part of the world; warlike neighbours surrounded them on
all sides, rendering it difficult for any of them to enlarge their
territory at home. The colonies of the Dorians resorted chiefly to
Italy and Sicily, which, in the times preceding the foundation of
Rome, were inhabited by barbarous and uncivilised nations: those of
the Ionians and Eolians, the two other great tribes of the Greeks,
to Asia Minor and the islands of the Egean Sea, of which the
inhabitants seem at that time to have been pretty much in the same
state as those of Sicily and Italy. The mother city, though she
considered the colony as a child, at all times entitled to great
favour and assistance, and owing in return much gratitude and
respect, yet considered it as an emancipated child over whom she
pretended to claim no direct authority or jurisdiction. The colony
settled its own form of government, enacted its own laws, elected
its own magistrates, and made peace or war with its neighbours as
an independent state, which had no occasion to wait for the
approbation or consent of the mother city. Nothing can be more
plain and distinct than the interest which directed every such
establishment.
Causes of Prosperity of new Colonies: The
colony of a civilised nation which takes possession either of a
waste country, or of one so thinly inhabited that the natives
easily give place to the new settlers, advances more rapidly to
wealth and greatness than any other human society.
The colonists carry out with them a knowledge of agriculture and of
other useful arts superior to what can grow up of its own accord in
the course of many centuries among savage and barbarous nations.
They carry out with them, too, the habit of subordination, some
notion of the regular government which takes place in their own
country, of the system of laws which supports it, and of a regular
administration of justice; and they naturally establish something
of the same kind in the new settlement.
Of the Advantages which Europe has derived from the
Discovery of America, and from that of a Passage to the East Indies
by the Cape of Good Hope: Such are the advantages
which the colonies of America have derived from the policy of
Europe.
What are those which Europe has derived from the discovery and
colonization of America?
Those advantages may be divided, first, into the general advantages
which Europe, considered as one great country, has derived from
those great events; and, secondly, into the particular advantages
which each colonizing country has derived from the colonies which
particularly belong to it, in consequence of the authority or
dominion which it exercises over them.
The general advantages which Europe, considered as one great
country, has derived from the discovery and colonization of
America, consist, first, in the increase of its enjoyments; and,
secondly, in the augmentation of its industry.
The surplus produce of America, imported into Europe, furnishes the
inhabitants of this great continent with a variety of commodities
which they could not otherwise have possessed; some for conveniency
and use, some for pleasure, and some for ornament, and thereby
contributes to increase their enjoyments.
Conclusion of the Mercantile System: Smith's
argument about the
international political
economy opposed the idea of Mercantilism. While the Mercantile
System encouraged each country to horde gold, while trying to grasp
hegemony, Smith argued that free trade would eventually make all
actors better off. This argument is the modern 'Free Trade'
argument.
Of the Agricultural Systems...: Chapter 9's long
title is "Of the Agricultural Systems, or of those Systems of
Political Economy, which Represent the Produce of Land, as either
the Sole or the Principal, Source of the Revenue and Wealth of
Every Country".
That system which represents the produce of land as the sole source
of the revenue and wealth of every country has, so far as by that
time, never been adopted by any nation, and it at present exists
only in the speculations of a few men of great learning and
ingenuity in France. It would not, surely, be worth while to
examine at great length the errors of a system which never has
done, and probably never will do, any harm in any part of the
world.
Book V: Of the Revenue of the Sovereign or Commonwealth
Smith postulated four "maxims" of taxation: proportionality,
transparency, convenience, and efficiency. Some economists
interpret Smith's opposition to taxes on transfers of money, such
as the
Stamp Act, as opposition to capital
gains taxes, which did not exist in the eighteenth century. Other
economists credit Smith as one of the first to advocate a
progressive tax. Smith wrote, "It is not
very unreasonable that the rich should contribute to the public
expense, not only in proportion to their revenue, but something
more in proportion."
Of the Expenses of the Sovereign or Commonwealth:
Smith uses this chapter to comment on the concept of taxation and
expenditure by the state. On taxation Smith wrote,
Smith advocates a tax naturally attached to the "abilities" and
habits of each echelon of society.
For the lower echelon, Smith recognized the intellectually erosive
effect that the otherwise beneficial division of labour can have on
workers, what Marx, though he mainly opposes Smith, later named
"alienation,"; therefore, Smith warns of the consequence of
government failing to fulfill its proper role, which is to preserve
against the innate tendency of human society to fall apart.
"Under Smith's model, government involvement in any area other than
those stated above would have a negative impact on economic growth.
This is because economic growth is determined by the needs of a
free market and the entrepreneurial nature of private persons. If
there is a shortage of a product its price will rise, and so
stimulate producers to produce more, while at the same time
attracting new persons into that line of production. If there is an
excess supply of a product (more of the product than people are
willing to buy), prices will fall and producers will focus their
energy and money in other areas where there is a shortage or where
there is a need which no one has yet satisfied (thereby creating a
new market)."
Of the Sources of the General or Public Revenue of the
Society: In his discussion of taxes in Book Five, Smith
wrote:
Proponents of progressive
taxation cite Smith to justify the modern implementation of
this idea, the disproportionate taxation of income.
Smith is absolutely against any form of income or capital gains
tax, as it punishes productivity. It is clear that Smith's
statement demonstrates that the means of the rich can greatly
benefit society, especially when taxes on their luxuries are used
to offset the hardships of the poor; however, in context with other
of his statements and his treatise as a whole, citing this
statement as evidence that Smith supports a tax on income, the
prevailing mode of modern, progressive taxation, is unreasonable.
Smith's statement suggests not a tax on income, the incentive and
reward for the further production and generation of wealth, but
rather a tax on expenditure. Naturally, the rich, having by their
superior revenue greater means to possess magnificent houses,
luxuries and vanities, would pay, in a tax on this expenditure,
disproportionally more than would the poor.
Of War and Public Debts:
Smith then goes on to say that even if money was set aside from
future revenues to pay for the debts of war, it seldom actually
gets used to pay down the debt. Politicians are inclined to spend
the money on some other scheme that will win the favor of their
constituents. Hence, interest payments rise and war debts continue
to grow larger, well beyond the end of the war.
Summing up, if governments can borrow without check, then they are
more likely to wage war without check, and the costs of the war
spending will burden future generations, since war debts are almost
never repaid by the generations that incurred them.
Reception and impact
Further reading
- An Inquiry into the Nature and Causes of the Wealth of
Nations: A Selected Edition Adam Smith (Author), Kathryn
Sutherland (Editor), 2008, Oxford Paperbacks, Oxford, UK; ISBN
978-0-199535-92-7
- Adam Smith's The Wealth of Nations: A modern-day
interpretation of an economic classic. Karen McCreadie, 2009,
Infinite Ideas, Oxford, UK; ISBN 978-1-906821-03-6
See also
Notes
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