Reading Guide: 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".
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