Macquarie University
POL264 Modern Political Theory
Tape 2: Adam Smith, Wealth of Nations
Copyright ©
1996 R.J. Kilcullen
To use this reading guide you will need to have before you either
the course Readings book or Adam Smith, The
Wealth of Nations, ed. R.H. Campbell, A.S. Skinner and
W.B. Todd (Oxford: Clarendon Press, 1976).
Related pages
Week 2: Adam Smith, Wealth of
Nations
Free Enterprise
Introduction
"Wealth" means "well-being"; Smith's book is in fact about
material well-being. The Wealth of Nations is an
influential statement of the case for
laissez-faire, the thesis that government should
not attempt to control or direct economic activity. His arguments
are in terms of both economic efficiency and justice. (Keep an
eye out for his references to justice and rights.) As you read
these extracts ask what functions he thinks governments do and do
not have, and why.
The Wealth of Nations is also a philosophy of
history. Smith distinguishes several stages of social development
culminating in "commercial civilisation", a state of considerable
and growing national "wealth" (well-being). The wealth of a
nation consists in the well-being of the mass of
ordinary citizens: in commercial nations wealth is well-diffused,
according to Smith. However, he does not see everything in
commercial civilisation in rose colour: keep an eye out for his
critical comments. The underlying cause of the development of
human society from the hunting to the commercial stage is one of
the "propensities" of human nature, the propensity to "truck"
(exchange). This leads to division of labour, which leads to
increased productivity. The best contribution governments can
make to the wealth of nations and to the progress of human
society is to leave individuals free to follow their natural
propensity to make exchanges.
The edition used in the Readings is edited by R.H.
Campbell, A.S. Skinner and W.B. Todd, Oxford, Clarendon Press,
1976.
READ INTRODUCTION, paras. 1-5, pp. 10-11
In paragraph 3, "those who are not so employed" (in useful
labour) means not the unemployed in the modern sense but the
higher social classes, who don't work, but "many of whom"
(according. to the last sentence of paragraph 4) "consume the
produce of 10 times, frequently of 100 times, more labour" than
those who do work. How did it come about that modern nations are
wealthy enough to support such a higher class? How is it that the
productivity of those who do labour is so great that they can
carry such a burden? Note the heading for book I: "Of the Causes
of Improvement in the productive Powers of Labour [of those who
work] and of the Order according to which its produce is
naturally distributed among the differnt Ranks of the people [the
labourers, the higher ranks, etc.]".
Causes of increased productivity
READ Chapter I pp. 13-15 and 21-2, paragraphs
1-3 and 9-10
Comments
Most people these days would probably say that advances in
productivity have been due to the introduction of machinery and
other technology, deriving from advances in science. Adam Smith's
answer is different: advances are due to increased specialisation
of labour. The work of various kinds of philosophers, scientists
and engineers are examples of this division of labour. More basic
than technology is the division of labour which enables
technology itself to develop and progress. So specialisation is
the key to human material well-being.
READ Chapter II
I.ii, pp. 25-30
Comments
The division of labour is here traced back to a "propensity to
truck" and also to self-love. "This division of labour... is not
originally the effect of any human wisdom": compare TMS
(Theory of Moral Sentiments), p.87 "the wisdom of
man," "the wisdom of God".
Smith does not suppose that self-love is the same as selfishness
or that it is the only or chief motive of human action (cf.
Joseph Butler in Raphael, para. 382-6). However, in The
Wealth of Nations he analyses those social phenomena that
do arise from self-love.
In paragraph 2 he claims that the propensity to truck is found in
no animal except man. This claim is not essential to his analysis
of human economic behaviour, which will still stand even if other
animals do engage in barter.
paragraph 5. "brought into a common stock"; the market is a form
of cooperation, a way of sharing individual talents.
READ I.iii, 1-4, pp. 30-34
Comments
Standard of living depends on the productivity of labour, which
depends on the division or specialisation of labour; and that
depends on the extent of the market, which (initially) depends on
safe water-transport. Geography is an important factor in
economic history.
Value and Price
READ I.v.1-7, pp. 47-50
Comments
This is a classic statement of the "labour theory of value"; that
the real value of a thing traded in a market is in proportion to
the amount of labour required to produce it and bring it to
market.
Notice in paragraph 4 the references to time, difficulty and
skill as dimensions of quantity of labour. Paragraphs 5-7 on
money (not printed paper, but a commodity, gold or silver,
distinguished from other commodities simply by the fact that
almost any other commodity could at almost any time be exchanged
for gold or silver). Money is used as a measure of value, but
fundamentally the measure of value is the labour put into making
the thing and bringing it to market.
READ I.vi.1-10, pp. 65-68
Comments
This chapter complicates the theory of relative prices: not only
labour, but also stock (real capital--tools, raw materials, goods
awaiting sale, etc.) and land are required for production, and
the capitalist, landlord, and labourer share the price.
paragraphs 1-4 relate to the "hunter" stage of social history. In
that stage "the whole produce of labour belongs to the
labourer"--the hunter's catch belongs wholly to him.
paragraphs 5-7 relate to a stage in which capital stock (e.g.
tools) is needed for production.
paragraph 8 relates to the stage at which land has become private
property. Rent is the payment for a licence to use land.
Paragraph 9 reasserts the labour theory of value after what might
have seemed, and perhas is, a retreat from it. Though some of the
price goes to capitalist and landlord, the value
of their shares is measured by how much labour they can buy with
it. Value is measured after all not by how much labour is
required to produce the thing and bring it to market, but how
much labour can be bought with it.
READ I.vii.1-16, pp. 72-75
Comments
Notice the distinction between "natural" and "market" price.
Market price, which fluctuates from day to day, is set by
fluctuating supply and demand, the natural price is the price at
which supply and demand would be in long-term equilibrium
(paragraph 15).
Notice "effectual" demand, paragraph 8--the demand of those who
have the means and the will to pay the natural price. A destitute
person dying of starvation has no effectual
demand for food, because they can't pay for it.
Wages
READ I.viii.5-13, pp. 82-85
Comments
"Combinations" of workmen, i.e. trade unions, were illegal.
paragraph 13, "pretenses:" in 18th century English "pretense"
meant "something put forward", a "claim", usually with no
implication of falsity.
READ I. viii, 14-15, pp. 85-6
Comments
Does the self-interest of the individual employer cause him to
conserve human resources? Or, on the contrary, do the
requirements of survival in competition with other firms drive
employers to deplete human resources (as they do other
resources)? "It seems impossible to reduce, for any considerable
time" etc., because the race of labourers will die out.
READ I.viii.16-18, 21, 22, pp. 86-7.
Comments
Wages are highest while the economy is "progressive" or growing.
READ I.24, p. 89
Comments
The "stationary state" is bad for labourers. The regressive state
is worse.
READ I.viii.36,39,40, pp. 96-98
Comments
paragraph 39: Cf. Malthus and Darwin (later)
paragraph 40: "The demand for men... regulates the production of
men", by way of variations in infant mortality due to variations
in wages--not because parents produce children for sale!
READ I.viii,44-5, pp. 99-101
Comments
paragraph 44: "Paid by the piece", i.e. "piece-work" paid by the
number of items produced.
paragraph 45: "it is pretended", i.e. "claimed".
Reasons for Difference in Wages
READ I.x.a.1-3, p. 116
Comments
Note the distinction between "the whole of the advantages and
disadvantages" (para. 1), on the one hand, and "pecuniary wages
and profit" (para. 2) on the other. Smith does not claim that
money wages and returns tend to equality in all
employments.
"The policy of Europe"; government policies followed in most
European countries in his time.
READ I.x.b.1, 6, 15, pp. 116-7, 118, 121-2.
I.x.b.39-40, p. 131
I.x.c.1-5, 12, pp. 135-6, 138.
Comments
"The property which every man has in his own labour" (para. 12):
Cf. Locke.
The second effect of "the policy of Europe" is to overstock some
professions and drive down wages in those professions by
educating aspirants at public expense. Thus scholarships etc. to
encourage the education of the clergy result in low pay for
clergymen, and also for writers and teachers.
The usual reward of the eminent teacher bears no proportion to
that of the lawyer or physician; because the trade of the one is
crowded with indigent people who have been brought up to it at
the public expense; whereas those of the other two are encumbered
with very few who have not been educated at their own. (Paragraph
38, p. 149.)
(These days education in law and medicine is subsidised, but the
length of courses reduces competition among graduates. Even so
these professions are said to be over-stocked.)
READ I.x.c.41-43,45,59, pp. 151-152, 157.
Comments
"Settlement", paragraph 45: Support for
the poor was the
responsibility of the parish (a unit of local government);
parishes did not allow poor workmen to come in from other
parishes in case they might need support from parish rates. The
law of settlement gave local government the right to deny
residence to poor people from elsewhere.
Rent
READ I.xi.a.2,5,6,8, pp. 160-2.
I.xi.p, pp. 264-7.
Comments
Of the three great orders of society--landlords, workmen,
capitalists (employers, dealers)--the first two have an interest
identical with that of "society" (of which workmen are the most
numerous part), but are likely to be too ignorant to further it,
the third have an interest contrary to that of society and know
how to further it. (What is "the general interest of society"? Is
it to attain full economic development, or to grow?) On dealers:
"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"; I.x.c.27, p. 145. "Whenever the legislature attempts to
regulate the differences between masters and their workmen, its
counsellors are always the masters"; I.x.c.61, p. 157. Cf.
I.viii.13, p. 84. The capitalists are in a conspiracy against
landlords and workmen, against society at large. Smith was not
the simple optimist about "commercial society" that he is
sometimes supposed to have been.
Stock
READ II Introduction, 1-4, pp. 276-7.
Comments
Accumulation of capital is necessary for (and leads to further)
division of labour and increased productivity. Anything that
retards accumulation of capital, e.g. by reducing returns on
capital, retards division of labour and thus retards increase in
productivity.
The Course of Economic Development in Europe
READ III.i.8-9, p. 380. The natural course of
things was not followed. It was "entirely inverted". Book III is
an attempt to explain the order of development actually followed.
Summary of III.ii: During the early middle ages great tracts of
land were monopolised by great landlords and agriculture was
carried on by serfs or oppressed tenants. Neither the military
landlords nor the tenants were likely to make much improvement in
agriculture: the landlords were not sufficiently involved in it
(it was beneath them, and they were busy with their knightly
occupations), and the tenants would not make improvements if the
benefit would go to the oppressive landlord. This situation began
to change when central government (the king) formed an alliance
with dwellers in the towns against the great landlords.
READ III.iii. 8,12, p. 401-2, 405.
III.iii.13,15 p. 405, 406, 407.
III iv.1,2,4-5, pp. 411-3.
III.iv.10,13,15,17,18, pp. 418-422.
Comments
In paragraph 10 (p. 418), notice "silent and insensible
operation", and in paragraph 17 "not the least intention to serve
the public". It pleases Adam Smith to be able to point out the
unintended, unnoticed, surprising, and good
social effects of things people do for reasons of their own. This
illustrates the working of God's providence. Cf. The Theory
of Moral Sentiments, pp. 183-5.
The Mercantile System
In Book IV Smith criticises the "mercantile" system of public
policy. It was once thought that the wealth of a nation consisted
in money (gold and silver). Governments tried to make their
countries wealthy by prohibiting export of gold and silver (they
had in mind the need to have gold and silver available to buy
arms and soldiers in time of war; money could be translated
fairly quickly into military power). However, merchants found
this inconvenient, because they needed to send gold and silver
abroad to pay for what they were importing, and they persuaded
governments instead to attend to "the balance of trade" (the
relation between imports and exports), claiming that what makes a
country rich is to export much and import little, since exports
bring money into the country and imports send it out. Hence
governments adopted policies favouring exports and hindering
imports, encouraging local production ("protectionism" in modern
terms). This policy Smith calls the "mercantile" policy because
it was advocated by merchants. He will argue that governments
should not particularly favour exports or hinder imports and
should allow individuals to get on with making money in the way
that seems best to them--they know their own business best, and
the wealth of the country consists in their wealth.
READ IV.i.19, pp. 439-40.
IV.i.31, p. 446-7.
Protectionism
READ IV.ii.1-5, 7-11, pp. 452-4, 455-457.
Notice again in p.456 the idea that individuals benefit the
public without intending to, by following their own interest.
This is the second of the 3 passages in which Smith refers to the
invisible hand (i.e. God's providence). Again, he is interested
in the unexpected good social effects of actions
done for private gain. Contrast this with Hobbes: Hobbes analyses
the bad effects for everyone in the state of nature if
individuals do things that are sensible for them as individuals
to do.
Export Bounties
READ IV.v.a.3, pp. 505-6. The effect of all the
expedients of the mercantile system is to force the trade of a
country into a channel much less advantageous for the country
than that in which it would naturally run of its own accord, i.e.
if individuals sought their own benefit in their own ways.
The Corn Laws
The "corn laws" were designed to regulate trade in food grains,
encouraging export of grain from England, preventing import of
grain from elsewhere except in times of famine, and imposing
various restrictions upon the operations of retailers of grain
("corn merchants"). The ostensible purpose of these laws was to
provide for the feeding of the English population by encouraging
local grain growers.
READ IV.v.b.3, pp. 524-5.
Comments
The same argument would apply to all goods and services: to
petrol during a petrol strike, to house repairs after a storm.
Dealers who charge as much as the market will bear perform,
without intending it, a public service.
READ IV.v.b.15-16, pp. 530-1.
IV.v.b.25, pp. 533-4.
IV.v.b.39, pp. 538-9.
IV.v.b.43, p. 540.
Comments
Paragraph 16: "Both laws were evident violations of
natural liberty and therefore unjust". Note the
phrase "natural liberty" and the reference to justice.
Para. 39, "The liberal system of free exportation". "Liberal"
here is not a party label, though it soon became one.
Libertas in Latin is freedom. "Liberal" means
characterised by freedom. In the 19th century the party of free
trade came to be called the Liberal Party.
Para. 43, "The revolution": the "Glorious Revolution" of 1688,
the revolution Locke defended.
Of Colonies
The American revolution was taking place when Smith was writing.
The "mercantile" policy in relation to colonies was to prevent
colonists from trading except with the colonising nation, the aim
being a self-sufficient empire in which the merchants of the
colonising nation would flourish. Smith, in contrast, advocates
something like the ancient Greek practices in colonisation:
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 an
emancipated child, over whom she pretended to claim no direct
authority or jurisdiction. (IV.vii.2, p. 556.)
So Smith was in favour of giving the colonists the right to trade
as they saw fit.
READ IV.vii.b.44, p. 582.
IV.vii.c.46-50, pp. 607-609.
Comments
Smith's arguments against monopolies and other interferences with
free enterprise are of two kinds. They are
- partly in terms of the "sacred rights" of mankind, i.e. of
natural rights and liberties (see I.x.c.12, p. 138; I.x.c.59, p.
157; IV.v.b.16, p. 530; IV.vii.b.44, p. 582), and
- partly in terms of the economic loss caused by directing
economic activity into channels less profitable than it would
take if people were left to follow their own perception of their
interests (see IV.ii.9-10, p. 456; IV.v.b.16, p. 530).
READ IV.vii.c.63-66, pp. 613-617. The
contemptuous phrase "a nation of shopkeepers" was later used by
Napoleon to express contempt for the British, who then took it up
with pride.
The American Revolution
READ IV.vii.c.74, pp. 621-2.
Comment
Smith goes on to suggest that the American colonists be given
representation in the British parliament. He envisages with
equanimity eventual removal of the capital of the British Empire
to America. (The revolt of the American colonies was in progress
when Smith was writing his book.)
Injustices to native peoples
READ IV.vii.c.80, pp. 626-7.
Comment
In IV.i.32. p. 448, Smith says; "The savage injustices of the
Europeans rendered an event, which ought to have been beneficial
to all, ruinous and destructive to several of these unfortunate
countries".
The economic case against colonial monopolies
READ IV.viii.c.87-88, pp. 629-30.
This long chapter ends with criticism of the East India Company,
paragraphs 101-8, p. 635-41. Compare V.i.e.26-30, pp. 746-755.
He has been criticising the mercantile theory, the policies
advocated by merchants. Now we come to a theory favourable to
agricultural interests.
The Agricultural System (IV.ix)
This is the theory of the "physiocrats" (the "nature rules"
theory) or "Economists", French thinkers of whom the most famous
was Francois Quesnay. They held that only agriculture produces
genuine wealth and that governments should leave agriculture free
of regulation ("laissez faire"), so that the "natural" system of
wealth-production can take its course. Smith rejects the thesis
that only agriculture produces real wealth but agrees with the
physiocrats in opposing government regulation.
The physiocrats did not advocate impeding manufacture, but some
governments have done so:
READ IV.ix.48-52, pp. 686-8.
Comments
This is the conclusion of Smith's critique of two other systems
of political economy, in favour of his own "system of natural
liberty".
Notice Smith's account of the functions of government. In the
remaining book (book V) of the Wealth of Nations he
goes on to discuss taxation and government expenditure.
Defence
READ V.i.a.1-9,14-18, 39, 41, 42, pp. 689-694,
697-8, 705-707.
Comment
Notice the division of social history into the hunter, shepherd,
farmer and commercial stages. Compare I.vi.1-8, pp. 65-67.
Justice
READ V.i.b.1-3,7,12,13,20, pp. 709-712, 715,
719-20.
Smith goes on to consider the best way of financing public works
then (V.i.f, p. 758) to the financing of education (he proposes
that teachers should get at least part of their pay from fees
paid direct to them by pupils, to make teachers more zealous),
then (V.i.g, p. 788) to the financing of religious establishments
(he quotes Hume, to the affect that ministers should be wholly
supported by the state, to make them less
zealous; V.i.g.6, p. 791).
READ V.i.f.6-8,14, 46-7, pp. 760-1, 763, 780-1.
Taxation
READ V.ii.b.2-6, pp. 825-7.
V.ii.e.6, p. 842.
V.ii.e.9-11, pp. 843-4.
After many more pages on taxation, Smith comes to the public
debt, ending (and it is the end of the Wealth of
Nations) with more comments relating to dependencies and
colonies: criticism of British colonial policy has been one of
the sub-themes of the book.
READ V.iii.89, p. 944.
V.iii.92. pp. 946-7.
Summary
In The Wealth of Nations Adam Smith argues that the
progress of human well-being has been due and will continue to be
due primarily to free exchange, which makes possible division of
labour, and that government cannot hasten this natural process.
The chief function of government is to protect freedom of
exchange by upholding justice, i.e. property rights.
Questions for Discussion
- What is Adam Smith's critique of the mercantile system?
- What difference does he see between society in the age of
hunters, of shepherds, of commercial civilization?
- What colonial policy does he propose?
- What is accomplished by the 'invisible hand', and how?
- What does Smith say about the rights and interests of the
lowest classes?
- In what way did Malthus and Ricardo destroy the optimism (if
that's a fair description) of Adam Smith's account of social
development and make economics the "gloomy science"?
Further Study
In Articles and Chapters, p. 219, there are some
lectures on Adam Smith. (The page numbers used in those lectures
are to a different edition, by Cannan.)
See also in Articles and Chapters the article by
A.S. Skinner, "Adam Smith: An Economic Interpretation of
History".
See also the Malthus and Ricardo extracts in
Readings, pp. 56, 60. They argued that the increase
in population must outstrip food production, and this must
increase the share that landlords can exact in rent, so the
future for the poor is very bleak. Then in Articles and
Chapters, p. 24, see Heilbroner, "The Gloomy Presentiments
of Parson Malthus and David Ricardo", and on p. 39 the essay by
Bernard Shaw, "Economic".
In POL167 Supplement see "Free Enterprise and its
Critics".
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