Macquarie University
POL264 Modern Political Theory
Reading Guide: Adam Smith, Wealth
of Nations
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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