The Wealth of Nations
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The Wealth of Nations
Author(s)
Adam Smith
Country
United Kingdom (Scotland)
Genre(s)
Economics
Publisher
W. Strahan and T. Cadell, London
Publication date
1776
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The
Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith. First
published in 1776, it is a reflection on economics at the beginning of the Industrial Revolution and argues that
free market economies are more productive and beneficial to their societies. The book is a fundamental work in
classical economics.
1 History
1.1 Publishing history
1.2 Anachronisms and terminology
2 Synopsis
2.1 Book I: Of the Causes of Improvement
2.2 Book II: Of the Nature, Accumulation, and Employment of Stock
2.3 Book III: Of the different Progress of Opulence in different Nations
2.4 Book IV: Of Systems of political Economy
2.5 Book V: Of the Revenue of the Sovereign or Commonwealth
3 Reception and impact
3.1 United States
4 Two views of the Wealth of Nations
5 Modern evaluations
6 Further reading
7 See also
8 Notes
9 References
10 External links
History
The Wealth of Nations was first published on 9 March 1776, during the British Agricultural Revolution. It
influenced a number of authors and economists, as well as 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 responded to 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, 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 shift in the field of
economics, similar to Sir Isaac Newton's Principia Mathematica for physics, Antoine Lavoisier's Traité
Élémentaire de Chimie for chemistry, or Charles Darwin's On the Origin of Species for biology.
[edit] 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 sixth edition in 1904.[1] 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
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 from 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.
[edit] Anachronisms and terminology
Modern commentary on the work may suffer from anachronism— the imposition of modern context on a 250year-old work.
The book is written in English of the late 18th century, 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".
 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: Division of labour has caused a greater increase in production than any other factor.
This diversification is greatest for nations with more industry and improvement, and is responsible for
"universal opulence" in those countries. Agriculture is less amenable than industry to division of labour; hence,
rich nations are not so far ahead of poor nations in agriculture as in industry.
Of the Principle which gives Occasion to the Division of Labour: Division of labor arises not from innate
wisdom, but from humans' propensity to barter. The apparent difference in natural talents between people is a
result of specialization, rather than any innate cause.
That the Division of Labour is Limited by the Extent of the Market: Limited opportunity for exchange
discourages division of labor. Because "water-carriage" extends the market, division of labor, with its
improvements, comes earliest to cities near waterways. Civilization began around the highly navigable
Mediterranean Sea...
Of the Origin and Use of Money: With division of labor, the produce of one's own labor can fill only a small
part of one's needs. Different commodities have served as a common medium of exchange, but all nations have
finally settled on metals, which are durable and divisible, for this purpose. Before coinage, people had to weigh
and assay with each exchange, or risk "the grossest frauds and impositions." Thus nations began stamping
metal, on one side only, to ascertain purity, or on all sides, to stipulate purity and amount. The quantity of real
metal in coins has diminished, due to the "avarice and injustice of princes and sovereign states," enabling them
to pay their debts in appearance only, and to the defraudment of creditors.
Of the Real and Nominal Price of Commodities, or of their Price in Labour, and their Price in Money: In the
first two passages Smith gives two conflicting definitions of the relative value of a commodity. Ricardo
responded to one of Smith's inconsistencies in the Preface of his "Principles":
The writer, in combating received opinions, has found it necessary to advert more particularly to those
passages in the writings of Adam Smith from which he sees reason to differ; but he hopes it will not, on that
account, be suspected that he does not, in common with all those who acknowledge the importance of the
science of Political Economy, participate in the admiration which the profound work of this celebrated author so
justly excites.[2]
Adam Smith defines the value of commodities by the labour embedded and also by the labour a good
commands. Ricardo agrees with the first definition:
"The real price of every thing," says Adam Smith,[3] "What every thing really costs to the man who wants to
acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it,
and who wants to dispose of it, or exchange it for something else, is the toil and trouble which it can save to
himself, and which it can impose upon other people. That this is really the foundation of the exchangeable value
of all things, excepting those which cannot be increased by human industry, is a doctrine of the utmost
importance in political economy."[4]
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:
"When the quantity of any commodity which is brought to market falls short of the effectual demand, all
those who are willing to pay... cannot be supplied with the quantity which they want... Some of them will be
willing to give more. A competition will begin among them, and the market price will rise... When the quantity
brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole
value of the rent, wages and profit, which must be paid in order to bring it thither... The market price will
sink..."[6]
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.
"A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade
or manufactures. The monopolists, by keeping the market constantly understocked, by never fully supplying the
effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether
they consist in wages or profit, greatly above their natural rate. The price of monopoly is upon every occasion
the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest
which can be taken, not upon every occasion, indeed, but for any considerable time together. The one is upon
every occasion the highest which can be squeezed out of the buyers, or which, it is supposed, they will consent
to give: the other is the lowest which the sellers can commonly afford to take, and at the same time continue
their business."[7]
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 workers associations, 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 the subject.
Masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the
wages of labour above their actual rate [...] Masters, too, sometimes enter into particular combinations to sink
the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy till
the moment of execution; and when the workmen yield, as they sometimes do without resistance, though
severely felt by them, they are never heard of by other people". In contrast, when workers combine, "the
masters [...] never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of
those laws which have been enacted with so much severity against the combination of servants, labourers, and
journeymen."[8]
In societies where the amount of labour exceeds the amount of revenue available for waged labour, competition
among workers is greater than the competition among employers, and wages fall. Inversely, where revenue is
abundant, labour wages rise. Smith argues that, therefore, labour wages only rise as a result of greater revenue
disposed to pay for labour. Smith thought labour the same as any other commodity in this respect:
"the demand for men, like that for any other commodity, necessarily regulates the production of men;
quickens it when it goes on too slowly, and stops it when it advances too fast. It is this demand which regulates
and determines the state of propagation in all the different countries of the world, in North America, in Europe,
and in China; which renders it rapidly progressive in the first, slow and gradual in the second, and altogether
stationary in the last."[9]
However, the amount of revenue must increase constantly in proportion to the amount of labour for wages to
remain high. Smith illustrates this by juxtaposing England with the North American colonies. In England, there
is more revenue than in the colonies, but wages are lower, because more workers flock to new employment
opportunities caused by the large amount of revenue— so workers eventually compete against each other as
much as they did before. By contrast, as capital continues to flow to the colonial economies at least at the same
rate that population increases to "fill out" this excess capital, wages there stay higher than in England.
Smith was highly concerned about the problems of poverty. He writes:
"poverty, though it does not prevent the generation, is extremely unfavourable to the rearing of children [...]
It is not uncommon [...] in the Highlands of Scotland for a mother who has borne twenty children not to have
two alive [...] In some places one half the children born die before they are four years of age; in many places
before they are seven; and in almost all places before they are nine or ten. This great mortality, however, will
every where be found chiefly among the children of the common people, who cannot afford to tend them with
the same care as those of better station."[10]
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, show 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 loaned. 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 that 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:
"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. It is impossible indeed to prevent such
meetings, by any law which either could be executed, or would be consistent with liberty and justice. But
though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do
nothing to facilitate such assemblies; much less to render them necessary."[11]
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 the tenant
can afford in the actual circumstances of the land. In adjusting lease terms, 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."
"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:
"One sort of labour 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: (this is the section in the World of Ideas)
"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 he thought hindered 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 for poor adults, a judiciary, and a standing
army—institutional systems not directly profitable for private industries.
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.
"As every individual, therefore, endeavors as much as he can both to employ his capital in the support of
domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual
necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither
intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of
domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a
manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many
other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the
worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the
society more effectually than when he really intends to promote it." (Book 4, Chapter 2)
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 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 hoard gold, while trying to
grasp hegemony, Smith argued that free trade eventually makes 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 worthwhile 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 18th century.[12] Other economists credit Smith as one of the first
to advocate a progressive tax.[13][14] 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,
"The subjects of every state ought to contribute towards the support of the government, as nearly as possible,
in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy
under the protection of the state. The expense of government to the individuals of a great nation is like the
expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to
their respective interests in the estate. In the observation or neglect of this maxim consists what is called the
equality or inequality of taxation."
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.
..."the understandings of the greater part of men are necessarily formed by their ordinary employments. The
man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always
the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in
finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of
such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become.
The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation,
but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment
concerning many even of the ordinary duties of private life... But in every improved and civilized society this is
the state into which the laboring poor, that is, the great body of the people, must necessarily fall, unless
government takes some pains to prevent it."[15]
Under Smith's model, government involvement in any area other than those stated above negatively impacts
economic growth. This is because economic growth is determined by the needs of a free market and the
entrepreneurial nature of private persons. A shortage of a product makes its price rise, and so stimulates
producers to produce more and attracts new people to that line of production. An excess supply of a product
(more of the product than people are willing to buy) drives prices down, and producers refocus energy and
money to other areas where there is a need.[16]
Of the Sources of the General or Public Revenue of the Society: In his discussion of taxes in Book Five, Smith
wrote:
"The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the
greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal
expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries
and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich;
and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very
unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but
something more than in that proportion."[17]
Proponents of progressive taxation cite Smith[citation needed] to justify the modern implementation of this
idea, the disproportionate taxation of income.
Of War and Public Debts:
"...when war comes [politicians] are both unwilling and unable to increase their [tax] revenue in proportion to
the increase of their expense. They are unwilling for fear of offending the people, who, by so great and so
sudden an increase of taxes, would soon be disgusted with the war [...] The facility of borrowing delivers them
from the embarrassment [...] By means of borrowing they are enabled, with a very moderate increase of taxes,
to raise, from year to year, money sufficient for carrying on the war, and by the practice of perpetually funding
they are enabled, with the smallest possible increase of taxes [to pay the interest on the debt], to raise annually
the largest possible sum of money [to fund the war]. ...The return of peace, indeed, seldom relieves them from
the greater part of the taxes imposed during the war. These are mortgaged for the interest of the debt contracted
in order to carry it on."[18]
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.
[edit] Reception and impact
The first edition of the book sold out in six months.[19] The printer William Strahan wrote on 12 April 1776
that David Hume had said that The Wealth of Nations required too much thought to be as popular as Edward
Gibbon's The History of the Decline and Fall of the Roman Empire. Strahan also wrote: "What you say of Mr.
Gibbon's and Dr. Smith's book is exactly just. The former is the most popular work; but the sale of the latter,
though not near so rapid, has been more than I could have expected from a work that requires much thought and
reflection (qualities that do not abound among modern readers) to peruse to any purpose".[20] Gibbon wrote to
Adam Ferguson on 1 April: "What an excellent work is that with which our common friend Mr. Adam Smith
has enriched the public! An extensive science in a single book, and the most profound ideas expressed in the
most perspicuous language".[21] The review of the book in the Annual Register was probably written by Whig
MP Edmund Burke.[22]
Smith's biographer John Rae contends that The Wealth of Nations shaped government policy soon after it was
published. In 1777 the Prime Minister, Lord North, in the first budget after the book was published, got the idea
for two new taxes from the book: one on man-servants and the other on property sold at auction. The budget of
1778 introduced the inhabited house duty and the malt tax, both recommended by Smith. In 1779 Smith was
consulted by politicians Henry Dundas and Lord Carlisle on the subject of giving Ireland free trade.[23]
The Wealth of Nations was first mentioned in Parliament by the Whig leader Charles James Fox on 11
November 1783: "There was a maxim laid down in an excellent book upon the Wealth of Nations which had
been ridiculed for its simplicity, but which was indisputable as to its truth. In that book it was stated that the
only way to become rich was to manage matters so as to make one's income exceed one's expenses. This maxim
applied equally to an individual and to a nation. The proper line of conduct therefore was by a well-directed
economy to retrench every current expense, and to make as large a saving during the peace as possible".[24]
However Fox once told Charles Butler sometime after 1785 that he had never read the book and that "There is
something in all these subjects which passes my comprehension; something so wide that I could never embrace
them myself nor find any one who did".[25] In 1796 when Fox was dining with Lord Lauderdale, Lauderdale
remarked that we knew nothing of political economy before Adam Smith wrote. "Pooh," replied Fox, "your
Adam Smiths are nothing, but" (he added, turning to the company) "that is his love; we must spare him there".
Lauderdale replied: "I think he is everything", to which Fox rejoined: "That is a great proof of your
affection".[25] Fox also found Adam Smith "tedious" and believed that one half of The Wealth of Nations could
be "omitted with much benefit to the subject".[26]
In an editorial of The Times on 3 August 1787, it was stated: "It is astonishing to consider, how few merchants
are acquainted with Smith's Wealth of Nations, or Anderson's History of Commerce, which are certainly books
that should be perused by every man who makes trade his pursuit".[27]
The Wealth of Nations was next mentioned in Parliament by Robert Thornton MP in 1787 to support the
Commercial Treaty with France. In the same year George Dempster MP referenced it in the debate on the
proposal to farm the post-horse duties and in 1788 by a Mr. Hussy on the Wool Exportation Bill.[24] In 1791
the English radical Thomas Paine wrote in his Rights of Man that "Had Mr. Burke possessed talents similar to
the author ‘On the Wealth of Nations,’ he would have comprehended all the parts which enter into, and, by
assemblage, form a constitution".[28] The Prime Minister, William Pitt, praised Smith in the House of
Commons on 17 February 1792: "...an author of our own times now unfortunately no more (I mean the author
of a celebrated treatise on the Wealth of Nations), whose extensive knowledge of detail, and depth of
philosophical research will, I believe, furnish the best solution to every question connected with the history of
commerce, or with the systems of political economy".[29] In the same year it was quoted by Samuel Whitbread
MP and Fox (on the division of labour) in the debate on the armament against Russia and also by William
Wilberforce in introducing his Bill against the slave trade. It was not mentioned in the House of Lords until
1793, by Lord Lansdowne and Lord Loughbourough. Lansdowne said: "With respect to French principles, as
they had been denominated, those principles had been exported from us to France, and could not be said to have
originated among the population of the latter country. The new principles of government founded on the
abolition of the old feudal system were originally propagated among us by the Dean of Gloucester, Mr. Tucker,
and had since been more generally inculcated by Dr. Smith in his work on the Wealth of Nations, which had
been recommended as a book necessary for the information of youth by Mr. Dugald Stewart in his Elements of
the Philosophy of the Human Mind". Loughborough replied that "in the works of Dean Tucker, Adam Smith,
and Mr. Stewart, to which allusion had been made, no doctrines inimical to the principles of civil government,
the morals or religion of mankind, were contained, and therefore to trace the errors of the French to these causes
was manifestly fallacious".[30] On 16 May 1797 Pitt said in the debate on the suspension of cash payments by
the Bank of England that Smith was "that great author" but his arguments "though always ingenious" were
"sometimes injudicious".[31]
Sir John Mitford, the Solicitor-General, said on 22 December 1798 in speaking on cross-bills (a bill of exchange
given in consideration of another bill) that Smith "in his Wealth of Nations, explains the nature and pernicious
consequences of this practice with his usual perspicuity and philosophical accuracy".[32] On 5 December 1800
Lord Warwick said in a debate on the price of corn that:
There was hardly any kind of property on which the law did not impose some restraints and regulations with
regard to the sale of them, except that of provisions. This was probably done on the principles laid down by a
celebrated and able writer, Doctor Adam Smith, who had maintained that every thing ought to be left to its own
level. He knew something of that Gentleman, whose heart he knew was as sound as his head; and he was sure
that had he lived to this day and beheld the novel state of wretchedness to which the country was now
reduced—a state, which as the like had never occurred before, could never have entered into his mind; that
Great Man would have reason to blush for some of the doctrines he had laid down. He would now have
abundant opportunities of observing that all those artificial means of enhancing the price of provisions, which
he had considered as no way mischievous, were practised at this time to a most alarming extent. He would see
the Farmer keeping up his produce while the poor were labouring under all the miseries of want, and he would
see Forestallers, Regraters, and all kinds of Middle-men making large profits upon it.[33]
Lord Grenville replied that "he must remind him, that so far from there having been any difference in the state
of the Country when that great man lived, and the present times, his book was first published at a period,
previous to which there had been two or three seasons of great dearth and distress; and during those seasons
there were speculators without number, who raised an unfounded and unjust clamour against Forestallers and
Regraters, and who proposed that a certain price should be fixed on every article: but all their plans were wisely
rejected, and the Treatise on the Wealth of Nations, which came forward soon after, pointed out in the clearest
light how absurd and futile they must have been".[33]
In 1800 the Anti-Jacobin Review criticised The Wealth of Nations and Robert Southey in 1812 in the Quarterly
Review condemned The Wealth of Nations as a "tedious and hard-hearted book".[34]
In 1803 The Times argued against war with Spain: "She is our best customer; and by the gentle and peaceable
stream of commerce, the treasures of the new world flow with greater certainty into English reservoirs, than it
could do by the most successful warfare. They come in this way to support our manufactures, to encourage
industry, to feed our poor, to pay taxes, to reward ingenuity, to diffuse riches among all classes of people. But
for the full understanding of this beneficial circulation of wealth, we must refer to Dr. Adam Smith's
incomparable Treatise on the Wealth of Nations".[35] In 1810 a correspondent writing under the pseudonym of
Publicola included at the head of his letter Smith's line that "Exclusive Companies are nuisances in every
respect" and called him "that learned writer".[36] In 1821 The Times quoted Smith's opinion that the interests of
corn dealers and the people were the same.[37]
In 1826 the English radical William Cobbett criticised in his Rural Rides the political economists' hostility to
the Poor Law: "Well, amidst all this suffering, there is one good thing; the Scotch political economy is blown to
the devil, and the Edinburgh Review and Adam Smith along with it".[38]
The Radical MP Richard Cobden as a young man studied The Wealth of Nations; his copy is still in the library
of his home at Dunford House and there are lively marginal notes on the places where Smith condemns British
colonial policy. There are none on the passage about the invisible hand.[39] Cobden campaigned for free trade
in his agitation against the Corn Laws. On 13 October 1843 Cobden quoted (accurately) Smith's protest against
the "plain violation of the most sacred property" of every man derived from his labour.[40] On 8 May 1844 he
cited Smith's opposition to slave labour[41] and on 3 July 1844 claimed that Smith had been misrepresentated
by protectionists as a monopolist.[42] On 8 October 1849 Cobden claimed that he had "gone through the length
and breadth of this country, with Adam Smith in my hand, to advocate the principles of Free Trade." He also
said he had tried "to popularise to the people of this country, and of the Continent, those arguments with which
Adam Smith, David Hume, Ricardo, and every man who has written on this subject, have demonstrated the
funding system to be injurious to mankind, and unjust in principle".[43] Cobden believed it to be morally wrong
to lend money to be spent on war. When The Times claimed the political economists were against Cobden on
this, Cobden wrote on 16 October 1849: "I can quote Adam Smith whose authority is without appeal now in
intellectual circles, it gives one the basis of science upon which to raise appeals to the moral feelings".[44]
When in 1850 the Russian government attempted to raise a loan, ostensibly for the construction of a railway
from St. Petersburg to Moscow, but actually to cover the deficit brought about by its war against Hungary,
Cobden said on 18 January: "I take my stand on one of the strongest grounds in stating that Adam Smith and
other great authorities on political economy are opposed to the very principle of such loans".[45] In 1863,
during Cobden's dispute with The Times over its claims that his fellow Radical John Bright wanted to divide the
land of the rich amongst the poor, Cobden read to a friend the passage in the Wealth of Nations which criticised
primogeniture and entail. Cobden said that if Bright had been as plain-speaking as Smith, "how he would have
been branded as an incendiary and Socialist".[46] On 23 November 1864 Cobden proclaimed: "If I were five-
and-twenty or thirty, instead of, unhappily, twice that number of years, I would take Adam Smith in hand—I
would not go beyond him, I would have no politics in it—I would take Adam Smith in hand, and I would have a
League for free trade in Land just as we had a League for free trade in Corn. You will find just the same
authority in Adam Smith for the one as for the other; and if it were only taken up as it must be taken up to
succeed, not as a political, revolutionary, Radical, Chartist notion, but taken up on politico-economic grounds,
the agitation would be certain to succeed".[47]
The Liberal statesman William Ewart Gladstone chaired the meeting of the Political Economy Club to celebrate
the centenary of the publication of The Wealth of Nations.[48]
The Liberal historian Lord Acton believed that The Wealth of Nations gave a "scientific backbone to liberal
sentiment"[49] and that it was the "classic English philosophy of history".[50]
[edit] United States
James Madison, in a speech given in Congress on 2 February 1791, cited The Wealth of
Nations in opposing a national bank: "The principal disadvantages consisted in, 1st.
banishing the precious metals, by substituting another medium to perform their office:
This effect was inevitable. It was admitted by the most enlightened patrons of banks,
particularly by Smith on the Wealth of Nations".[51] Thomas Jefferson, writing to John
Norvell on 14 June 1807, claimed that on "the subjects of money & commerce, Smith's
Wealth of Nations is the best book to be read, unless Say's Political Economy can be had,
which treats the same subject on the same principles, but in a shorter compass & more
lucid manner".[52]
Further reading in Wikipedia:
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Free Trade
American School of Economics
Austrian School of Economics Free Trade and Capitalism
Classical economics
Marginalism
Neoclassical economics
Political economy
The Theory of Moral Sentiments (1759), Adam Smith's other classic
The National Gain, a pamphlet by Finnish-Swedish economist and politician Anders Chydenius which
preceded The Wealth of Nations and which had many ideas similar to it
Wealth (economics)
The Invisible Hand
Mercantilism