The Wealth Of Nations

INTRODUCTION

THE AGRICULTURAL SYSTEM

ADAM SMITH was appointed to the Chair of Logic at Glasgow University in 1751 and translated to the Chair of Moral Philosophy the following year. He served in this office for more than ten years, lecturing on rhetoric, theology, ethics, jurisprudence and economics. In this period he composed his remarkable essay on ‘The History of Astronomy’ and published the Considerations Concerning the First Formation of Languages (1761). But the most important of his published works in this period was The Theory of Moral Sentiments (1759): a work which was to establish his reputation and to transform his career. It was well received by both the public and Smith’s friends. In a delightful letter, David Hume reminded Smith of the futility of fame and public approbation, and having encouraged him to be a philosopher in practice as well as profession continued:

Supposing therefore, that you have duely prepared yourself for the worst by these Reflections; I proceed to tell you the Melancholy News, that your Book has been very unfortunate: For the Public seem disposed to applaud it extremely.¹

Charles Townshend was among those to whom Hume had sent a copy of Smith’s treatise. Townshend (1725–67) had been appointed First Lord of Trade and the Plantations in 1763 and later served as Chancellor of the Exchequer, where his taxation policy heightened the developing tension with the American Colonies. Townsend had married the widowed Countess of Dalkeith in 1755 and was sufficiently impressed by Smith’s work to arrange for his appointment as tutor to her son, the young Duke of Buccleuch. The position brought financial security (£300 sterling per annum for the rest of his life), and Smith eventually accepted, formally resigning his chair early in 1764.

Smith and his party left almost immediately for France to begin a sojourn of some two years. At the outset, the visit was unsuccessful, causing Smith to write to Hume, with some humour, ‘I have begun to write a book in order to pass away the time. You may believe I have very little to do.’² But matters improved with Smith’s increasing familiarity with the language and the success of a series of short tours. In 1765 Smith, the Duke, and the Duke’s younger brother, Hew Scott, reached Geneva, giving Smith an opportunity to meet Voltaire, whom he genuinely admired as ‘the most universal genius perhaps which France has ever produced’.³

The party arrived in Paris in mid February 1766, but their stay there was marred by the developing quarrel between Hume and Jean Jacques Rousseau, and brought to a tragic end by the death of the Duke’s younger brother. The party returned to London on 1 November. But from an intellectual point of view, the visit was a resounding success. David Hume had held a position at the British Embassy in Paris since 1763 and his contacts, and the reputation of The Theory of Moral Sentiments, ensured an entry to both English and French circles. The latter were especially important, in that Smith was afforded an opportunity to meet Diderot, Helvetius and Holbach. Other important contacts, of particular interest to the economist, included Quesnay, Mirabeau, Dupont de Nemours and Mercier de la Rivière, whose book, L’Ordre naturel et essentiel des sociétés politiques (1767), was considered by Smith to be ‘the most distinct and best connected account’ of physiocratic doctrine. Smith was also able to meet A. R. J. Turgot, later Minister of Finance, whose Reflections on the Formation and Distribution of Riches was in the process of completion.

At the time Smith arrived in Paris, the Journal d’agriculture and the Éphémérides du citoyen carried articles of a professional nature, and the central texts of the physiocratic movement were already published, most notably Quesnay’s Tableau économique (1758), Mirabeau’s Friend of Man (1756, 1760) and their joint work, the Philosophie rurale (1763). At the time, Quesnay was working upon the Analyse while Dupont de Nemours was writing his account of the Origin and Progress of a New Science, that of political economy.⁴

The content of Smith’s library confirms his interest in this movement.⁵ He also enjoyed his friendship with Quesnay, whom he described as ‘one of the worthiest men in France and one of the best physicians that is to be met with in any country. He was not only physician but the friend and confidant of Madame Pompadour, a woman who was no contemptible judge of merit.’⁶ In addition we have Dugald Stewart’s authority that ‘Mr Smith had once an intention (as he told me himself) to have inscribed to him his Wealth of Nations.’⁷

Smith also enjoyed a warm relationship with Turgot: a fact attested by Smith himself in a letter to the Duc de la Rochefoucauld, dated 1 November 1785, where he referred to the ‘ever-to-be-regretted Mr Turgot’. He added, ‘tho’ I had the happiness of his acquaintance, I flattered myself, even of his friendship and esteem, I never had that of his correspondence.’⁸ Another of Smith’s friends, the Abbé Morellet, confirmed that

M. Turgot, who like me loved things metaphysical, estimated his [Smith’s] talents greatly. We saw him several times; he was presented at the house of M. Helvetius; we talked of commercial theory, banking, public credit and several points in the great work he was meditating.⁹

Smith could hardly fail to be impressed by such a high level of activity in a distinctive field, nor by the presence of the macro-economic model first developed in Quesnay’s Tableau économique. It is now widely recognized that this basic model represented an advance in economic theory so considerable that it compared with Harvey’s discovery of the circulation of the blood. The economist and historian J. A. Schumpeter described the model as marking ‘the great breach’ and went on to point out:

Only with the help of such an analysis was it possible for further knowledge of the economic life process to develop and were scholars enabled to survey all the general factors and their functions as well as all the elements which have to be considered in every individual problem so far as it is purely economic.¹⁰

Schumpeter also said that the model represented ‘the first method ever devised in order to convey an explicit conception of the nature of economic equilibrium’.¹¹

But before approaching Smith’s account of the system in Book IV, Chapter IX, it is worth bearing in mind that he confronted, in effect, two versions of the argument. The first was the original model associated with the master, Quesnay, and the second the modified version introduced by the ‘revisionist’, Turgot.

François Quesnay (1694–1774)

Quesnay’s purpose was both practical and theoretical. As R. L. Meek has shown, Quesnay announced his purpose in a letter to Mirabeau which accompanied the first edition of the Tableau économique. ‘We must not lose heart,’ he wrote, ‘for the appalling crisis will come, and it will be necessary to have recourse to medical knowledge.¹²He clarified his position in a further letter to the Marquis de Mirabeau, written in 1758:

I have tried to construct a fundamental Tableau of the economic order for the purpose of displaying expenditure and products in a way which is easy to grasp, and for the purpose of forming a clear opinion about the organization and disorganization which the government can bring about.¹³

The model in question seeks to explore the interrelationships between output, the generation of income, expenditure and consumption – or in Quesnay’s words, a ‘general system of expenditure, work, gain and consumption’¹⁴which would expose the point that ‘the whole magic of a well-ordered society is that each man works for others, while believing that he is working for himself’.¹⁵As Meek put it:

In this circle of economic activity, production and consumption appeared as mutually interdependent variables, whose action and interaction in any economic period, proceeding according to certain socially determined laws, laid the basis for a repetition of the process in the next economic period.¹⁶

Perhaps the easiest way of introducing the issues involved is to consider the argument of the Analyse (1766). In this model Quesnay identified two main sectors of activity, agriculture and manufacture, together with three major socio-economic groups: the farmers; the proprietors of the land; and those engaged in manufacture. The farmers were defined as the productive class, since it was assumed that only agriculture was capable of generating surpluses. The proprietors were defined as the distributive class: a group which subsists on rent as their only form of income. The manufacturers were defined as important, since the goods they create are essential to the system, but also as sterile, since their activity was not assumed to generate any surpluses.

Having come thus far, Quesnay introduced the concept of avances (literally ‘advances’, or acts of investment) for which these classes may be responsible. The most interesting avances are those which may affect the farmers and manufacturers. These are the avances primitives, or investment in fixed capital, and the avances annuelles, that is investment in circulating capital. This decisive step already carries us well beyond Smith’s Lectures.

Quesnay then proceeded to identify the assumptions of the model. These are both qualitative and quantitative. The qualitative assumptions are set out in the Tableau économique¹⁷and were to reappear, with further additions, in The General Maxims for the Government of an Agricultural Kingdom.¹⁸Quesnay assumed, inter alia, that the whole revenue of the system would enter circulation; that there would be a constant level of population, with no movement between the sectors; no barriers to trade in corn or in manufactured products; a single tax (on the agricultural surplus); and large-scale (capital-using) farming. The quantitative assumptions include the statement that the annual net produce in the agrarian sector is 2 million livres (5 million livres gross). It is assumed that the total output of the manufacturing sector is 2 million livres and (implicitly) that the money supply is also 2 millions livres.

Quesnay then proceeded to develop his model in terms of an exercise in period analysis. In following out the logic of his argument, let us abstract from the complications presented by the government sector, by the presence of mercantile groups, and by the fact that the proprietors as a class have important economic functions. Let us further assume, for the sake of simplicity, that at the beginning of the period in question the proprietors have no resources saved out of income generated in the preceding period; that the farmers possess the entire stock of money at the beginning of the current period, together with 2 million livres’ worth of food produced in the preceding period and 1 million livres’ worth of raw materials, all available for sale. The manufacturing class are assumed to hold 2 million livres’ worth of manufactured goods produced in the preceding period, which are available for sale in the current period.

The ‘magic of a well-ordered society’ can now be illustrated in terms of a series of steps. First, the farmers transmit rent (i.e., the whole supply of money) to the proprietors of land (2 million livres), thus giving that class an income which can be used to make purchases of the primary and manufactured products which are necessary to sustain life in the current period. Let us assume that the proprietors transmit 1 million livres to the farmers in exchange for food and 1 million livres to the manufacturing sector, thus reducing the stocks of goods which were available for sale at the beginning of the current period. Let us also assume that the farmers transmit 1 million livres to the manufacturing sector in exchange for commodities, thus eliminating the stocks of goods held by this group.

This means in effect that the whole supply of money has moved from the farmers to the proprietors and then to the manufacturers. This class is now in a position to purchase food (1 million livres) and raw materials (1 million livres), thus eliminating the stocks of commodities held by the farmers and at the same time returning the whole stock of money to this sector. The proprietors thus end the period with no unspent income and no accumulation of commodities. The farmers hold the stock of money, while the agrarian and manufacturing sectors are able to replace the goods used up in the current period by virtue of current productive activity. The following period, on these assumptions, is then able to open under conditions identical to those which had obtained at the beginning of the current period.

The model has a deliberately abstract quality but also a number of deficiencies. There is no clear analysis of the division of labour, as Smith understood the term, and no analysis of the problem of price determination and the allocation of resources. There is no formal allowance made for profit, and nor is there a division between capitalists and wage labour – to name but a few issues of importance. Moreover, as is well known, Smith disagreed with a number of specific points which are associated with the physiocratic position: for example he rejected the idea of the impôt unique (single tax) together with the thesis that artificers (craftsmen), manufacturers, and merchants were unproductive. Indeed, the latter argument was described by Smith as the ‘capital error of this system’.¹⁹

But despite these criticisms, what Smith would have found in the Tableau économique was a model of the economic process that represents the working of a macro-economic system as one which involves a series of withdrawals of commodities (consumption and investment goods) from the market, which is matched in turn by a process of continuous replacement, by virtue of production in the same time period, all in the context of a capital-using system. Smith could hardly fail to be struck by the novelty of this model, or by the transformation effected by Turgot, who made good the bulk of the analytical deficiencies in Quesnay’s account.²⁰

Anne Robert Jacques Turgot, Baron de l’Aulne (1727–81)

The economic analysis in Turgot’s Reflections on the Formation and Distribution of Riches must have made an immediate impact on Smith, not least because Turgot opened his argument, as Smith had done in his Lectures on Jurisprudence, with an account of the division of labour.²¹Turgot drew attention to the causes of increased productivity and to the associated point that ‘the reciprocal exchange of needs, renders men necessary to one another and constitutes the bond of society’.²²He also offered a more familiar account of the ‘bond’ by developing a model which linked the different sectors of activity and the various socio-economic groups in a cycle which involves the generation of income, expenditure and productive activity. Turgot represented the first class as that of the cultivators. He restated the time-honoured dictum that ‘it is always the land which is the primary and the unique source of all wealth’.²³Strictly speaking, the husbandman ‘is therefore the unique source of all wealth, which, through its circulation, animates all the industry of society; because he is the only one whose labour produces anything over and above the wages of labour.’²⁴As before, the Cultivators are designated the ‘productive’ class.

The second social group is represented by the proprietors of land (the disposable class), who receive an income in the form of rent. This class ‘may be employed to meet the general needs of the Society, for example in war and the administration of justice, whether through personal service, or through the payment of a part of its revenue.’²⁵Turgot added, in a passage whose implications would be uncomfortable for some: ‘The Proprietor enjoys nothing except through the labour of the Cultivator… but the Cultivator has need of the Proprietor only by virtue of human conventions and the civil law.’²⁶Finally, there are the artisans, who do not generate any net revenue; and the stipendiary class, who are ‘supported by the product of the land’.²⁷

These would have been regarded as fairly conventional points, and so too would Turgot’s emphasis on the role of capital (fixed and circulating). But it is at this stage that Turgot advanced beyond Quesnay, by introducing a distinction between entrepreneurs and wage labour, and therefore a further distinction between profits and wages as categories of return. It is worthy of note that Turgot defined profit as the reward accruing to entrepreneurs for the risks incurred in combining the factors of production (i.e., fixed and circulating capital), while the ‘simple workman, who possesses only his hands and his industry, has nothing except in so far as he succeeds in selling his toil to others’.²⁸The industrial stipendiary class

finds itself, so to speak, subdivided into two orders; that of the Entrepreneurs, Manufacturers and masters who are all possessors of large capitals which they turn to account by setting to work, through the medium of their advances the second order, which consist of ordinary Artisans who possess no property but their own hands, who advance nothing but their daily labour, and who receive no profit but their wages.²⁹

Turgot also remarked that the position of the entrepreneurs engaged in agriculture ‘must be the same as that of the Entrepreneurs in Factories’,³⁰only adding,

We also see that it is capitals alone which establish and maintain great Agricultural enterprises, which give the land, so to speak, an invariable rental value, and which ensure to the Proprietors a revenue which is always regular and as high as it is possible for it to be.³¹

Turgot thus isolated four distinct factors of production (land, labour, capital and entrepreneurship), and three categories of return (rent, wages, and profit). He also supplied a distinctive version of the circular flow. If we map these points against Quesnay’s basic model, it now emerges that the entrepreneurs engaged in agriculture advance rent to the proprietors, thus providing this group with an income which is available for use in a given time period. The entrepreneurs advance wages to labour as a group and also effect purchases between the sectors in which they are engaged, as well as within the sectors to which they belong.

Looked at from another point of view, Turgot’s model indicates that output is made up of consumer and investment goods; that the income thus generated may be divided into two streams (consumption and saving) and used to make purchases of consumer and investment goods. The goods withdrawn from the market in a given period are then replaced by virtue of current productive activity. While aware of the possibility of contraction, it is interesting to note that Turgot believed that savings will normally be converted into capital expenditure ‘sur le champ’ (immediately).

The logic of the whole process was completed by the

intervention of merchants, properly so-called, between the Producers of commodities and consumers… this is the purpose of the profession of the Merchant, who buys commodities from the hands of the producer in order to accumulate them or put them in a warehouse, where the Consumer comes to get what he wants. By this means the Entrepreneur, assured of a market and of the return of his capital, devotes himself without anxiety and without any letting up, to produce further goods, and the consumer finds within his reach, and at any moment, the things of which he stands in need.³²

Thus the wholesaler replaces the outlays of the entrepreneurs; outlays which are in turn replaced by the purchases of retailers, whose outlays are in turn replaced by the purchases of consumer and of investment goods.

It is this continual advance and return of capitals which constitutes what ought to be called the circulation of money; that useful and productive circulation which enlivens all the work of society, which maintains movement and life in the body politic, and which is with good reason compared to the circulation of the blood in the animal body.³³

Turgot was then able to illuminate a further example of the interdependence of economic phenomena. His account had served to identify five different employments of capital, all of which are interdependent in a functional sense.³⁴Such capitals may be employed in the purchase of land, commerce, manufactures, agriculture, or lent at interest.³⁵He concluded that ‘the annual products which can be derived from capitals invested in these different employments are mutually limited by one another, and that all are relative to the existing rate of interest on money.’³⁶

Turgot introduced a further dimension to the discussion by referring to differential rates of return in the different employments of capital, which vary qualitatively, paying particular attention to the degree of labour and risk involved: ‘Thus the different employments of capital bring in very unequal products; but this inequality does not prevent their having a reciprocal influence on one another, nor the establishment of a kind of equilibrium between them.’³⁷He went on to point out that where a position of equilibrium was disturbed, forces will be set in motion which will tend to re-establish it. For example,

If interest on money becomes higher, people will prefer to lend it out rather than to turn it to account in a more troublesome and risky manner in agricultural, industrial and commercial enterprises; and only those enterprises will be embarked upon which bring, over and above the wages of labour, a profit much greater than the interest of money placed upon loan. In a word as soon as the profits arising from one employment of money, whatever it may be, increase or diminish, capitals either turn in its direction and are withdrawn from other employments, or are withdrawn from it and turn in the direction of other employments; and this necessarily alters in each of these employments the ratio between the capital and the annual product.³⁸

This is reminiscent of a passage in his Éloge [Eulogy] de Gournay (written in 1759, but unpublished in the author’s lifetime) where he rejected the criticisms levelled against his mentor:

All this despised system was founded on the ordinary maxim that in general a man knows his own interest better than another man can know it for him. Hence he concluded that as the interest of individuals is, on the whole, precisely the same as the general interest, we should leave every man free to manufacture whatever he considers desirable, because, with industry and commerce left free, it would be impossible for the aggregate individual interest, not to concur with the general interest.³⁹

If Henry Higgs could describe Cantillon’s Essai sur la nature du commerce en générale as a ‘statue silted by the sands of time’,⁴⁰we can surely agree that the Reflections is a ‘masterpiece’.⁴¹

Analytically, Turgot’s ‘super-model’ is light years ahead of the apparatus contained in Smith’s Lectures on Jurisprudence. As Meek has noted, with Turgot ‘Physiocracy begins to burst its seams’,⁴²thus clearing the way in effect for The Wealth of Nations.

Edwin Cannan was quite correct in stating that Smith’s account of Physiocratic teaching in Book IV, Chapter IX of The Wealth of Nations did not follow any one book closely, although it is safe to assume that the account of the basic model owed much to Quesnay. But the account offered by Smith is made more intriguing by the fact that, while remaining faithful to the outlines of the original, he went to great pains to associate the model with a clear division between factors of production and categories of return – thus suggesting that he had Turgot in mind, or at least that his account included elements from the ‘revisionists’. For example, in Smith’s account, the proprietors are stated to be responsible for the avances foncières, that is, for expenses incurred in improving land, buildings, drains, enclosures, and ‘other ameliorations, which they may either make or maintain upon it, and by means of which the cultivators are enabled, with the same capital, to raise a greater produce, and consequently to pay a greater rent’.⁴³Smith went on to note that this enhanced payment need not be regarded as rent properly so called: ‘This advanced rent may be considered as the interest or profit due to the proprietor upon the expense or capital which he thus employs.’⁴⁴The second class, that of the cultivators, is divided into two sections: farmers and country labourers,⁴⁵with the former having responsibility for two types of advance: original (or primitive) and annual. Smith defines the former in terms of investment in the instruments of husbandry, in the stock of cattle employed, and in the maintenance of the farmers’ servants and cattle. He went on to observe that the produce which remains to the farmer after the payment of rent was to be sufficient to replace the whole of his annual expenses together with the ordinary profits of stock, and to replace within ‘a reasonable time’ or the period of the lease, the whole of the original expenses together with a rate of return on capital equal to the ordinary or usual rate of profit. It is thus suggested that profit is the relevant form of return as far as the undertaker engaged in farming is concerned, and that it also accrues to the proprietor in respect of his avances foncières. In addition, the latter also receives a distinct form of return in the shape of rent, properly so called, which is ‘no more than the neat produce which remains after paying in the completest manner all the necessary expences which must be previously laid out in order to raise the gross, or the whole produce’.⁴⁶

As far as the third class is concerned, there is a division between manufacturers and merchants, and, in terms of the latter groups, between employers and labourers. The employers emerge as being responsible for certain advances, which include ‘materials, tools, and wages’,⁴⁷so that the goods produced, once sold, must be sufficient to repay the maintenance which the employer advances to himself, ‘as well as the materials, tools and wages which he advances to his workmen’. Wages thus emerge as the payment which accrues to the workmen, and profit as the fund which ‘is destined for the maintenance of their employer’.⁴⁸Such an account takes the reader well beyond Quesnay, and into the world of the Reflections.

The task of reaching some conclusions with regard to Smith’s sources helps to focus attention on the critical importance of his early writings, such as the Lectures on Jurisprudence and the early draft of The Wealth of Nations. As Edwin Cannan noted when introducing the Lectures in 1896, their discovery

enables us to follow the gradual construction of the work almost from its very foundation, and to distinguish positively between what the original genius of the author created out of British materials on the one hand and French materials on the other.⁴⁹

Cannan gave a good deal of emphasis to Smith’s debts to Francis Hutcheson, his former teacher, but did not dispute the influence of physiocratic teaching.

That Smith benefited from his own examination of the physiocratic system may be seen not so much in the account offered in The Wealth of Nations (Book IV, Chapter IX), as in the analytical apparatus of Books I and II. For example, although the theory of price and allocation which is developed in The Wealth of Nations relies on distinctions already established in the Lectures, supply price is now defined in terms of the ‘ordinary or average’ rates of payment for rent, profit and wages – a division that had struck Smith forcibly, and which still possessed some novelty, as may be seen in the way he warns his readers against confusion among them.⁵⁰ In this way Smith made allowance for the existence of the three factors of production, and also gave his analysis an explicitly static aspect by treating the rates of return as given and the factors as stocks rather than flows, at least in the short run. At the same time, the earlier analysis of allocation is transformed by the central role given to profit; a role which, as R. L. Meek has noted, finally exposed the real significance behind Smith’s earlier, intuitive, preoccupation with the ‘natural balance of industry’.⁵¹The theory of distribution was not a feature of Smith’s Lectures. Cannan was able to conclude that ‘Smith acquired the idea of the necessity of a scheme of distribution from the physiocrats’.⁵²

Secondly, in examining the functioning of the economy from a macro point of view, Smith produced an argument which gives a great deal of prominence to the different employments of capital and to the distinction between fixed and circulating capital. But it is perhaps in his treatment of the ‘division of stock’ seen from the standpoint of society at large,⁵³rather than from that of the individual entrepreneur, that physiocratic influence is to be seen at its strongest. For it is here that Smith divides the stock of society into fixed and circulating capital, where the latter included goods in process and those ready for sale during a particular period but which remain at the outset in the hands of the manufacturers, farmers and merchants who compose the system. In this way Smith presented the functioning of the economy in terms of a process of withdrawal (through purchase) from the circulating capital of society, which was matched by the replacement of the goods thus used up, by virtue of current productive activity. It is surely this kind of perspective on the working of the system which shows just how clearly Smith had grasped the significance of what the physiocrats were trying to do.

While Cannan tended to be dismissive of the influence of Turgot upon Smith, he concluded that despite the deficiencies of Quesnay’s basic model,

Nevertheless, in the fact that it attempts to give a comprehensive view of the total results of the industry of a year, it marks an enormous advance in economic theory, and we can easily imagine that an acute mind like Adam Smith’s would immediately grasp its importance.⁵⁴

But the reader should note that other assessments have been mixed. J. A. Schumpeter, for example, asserted that Smith ‘almost certainly… did not fully grasp the importance of the Tableau économique.’⁵⁵Melchior Palyi, writing on the occasion of the 150th anniversary of the publication of The Wealth of Nations, asserted that Smith’s treatment of physiocracy had been ‘scornful’,⁵⁶while more recently, Murray Rothbard expressed the view that Turgot’s influence on Smith was ‘minimal’.⁵⁷

There were others, closer to the event, who were also doubtful with regard to Smith’s account. Dugald Stewart, Professor of Moral Philosophy at Edinburgh University, and a profoundly influential figure in the early years of the nineteenth century, felt that Smith’s assessment of physiocracy had been less than generous,⁵⁸while Francis Horner, his pupil, argued with respect to Smith’s debts

That Smith did not properly distinguish the real import of the [physiocrats’] economic system, is now confessed, we believe, even by those who agree with him in rejecting it. We are further satisfied that he derived a much larger portion of his reasoning from them, than he himself perhaps recollected; that his principles on the formation and distribution of national riches approached more nearly to those of Quesnay, than he was himself aware; and that, to have recognised an entire coincidence, it was only necessary for him to have followed out his analysis a few steps further.⁵⁹

Other contemporaries were equally puzzled as to Smith’s lack of acknowledgement of Turgot. Condorcet, for example, writing on the Reflections, concluded that this essay ‘may be considered as the form of the treatise on The Wealth of Nations written by the celebrated Smith’. Dupont de Nemours, as Winch has recently reminded us, was even more forthright. The Reflections, he wrote,

consists of a very short octavo volume of less than 80 pages which is, nevertheless, particularly clear: everything that is true in the estimable but difficult work that M. Smith has since published on the same subjects in two large quarto volumes can be found there: and everything that Adam Smith has added lacks precision and foundation.’⁶⁰

Cannan, however, asserted that at a later period Dupont ‘repented of this outbreak, and confessed to a certain want of knowledge of the English tongue which had prevented him from appreciating Smith’s work as he ought to have done.’⁶¹

Perhaps the last word should be left to Smith, who recognized that the system,

with all its imperfections, is, perhaps, the nearest approximation to the truth that has yet been published upon the subject of political economy, and is upon that account well worth the consideration of every man who wishes to examine with attention the principles of that very important science.⁶²

THE MERCANTILE SYSTEM

The ‘agricultural system’ of the French economists was a ‘system’ in Smith’s sense of the term: ‘an imaginary machine, invented to connect together in the fancy those different movements and effects which are already in reality performed’.⁶³The teaching of the physiocrats had a theoretical basis which permitted them to make a series of policy recommendations in the circumstances which faced them. As R. L. Meek put it,

with the Physiocrats… we find a firm appreciation of the fact that areas of decision open to policy makers in the economic sphere have certain limits, and that a theoretical model of the economy is necessary to define these limits.⁶⁴

Mercantilism, or the ‘system of commerce’, to use Smith’s term, was quite different. To begin with, it was essentially policy-oriented, although even here it is necessary to avoid undue generalization. As the economic historian P. J. Thomas put it,

Mercantilism has often been described as a definite and unified policy or doctrine, but that it has never been. In reality it was a shifting combination of tendencies which, although directed to a common aim – the increase of national power – seldom possessed a unified system of policy, or even a harmonious set of doctrines.⁶⁵

A common view, associated with Gustav Schmöller’s The Mercantile System and its Historical Significance (1896), is that ‘in its innermost kernel it is nothing but state-making’.⁶⁶This view was echoed by Eli Hecksher in his classic study, Mercantilism (1955). Writing in the same vein, P. W. Buck observed, ‘Regarded as economic strategy, aimed at the achievement of political objectives in a world of competing national states, the policies of mercantilism exhibit logical consistency.’⁶⁷A. W. Coats recently offered this summary of objectives as the means of attaining the desired end of an increase in national power:

• the accumulation of treasure,

• the promotion of national wealth and economic growth,

• securing a favourable balance of trade,

• maximization of employment,

• the protection of industry,

• the encouragement of population, and

• state unification.⁶⁸

But it should be noted that if the strategy embraced a single end, the means of attaining it would inevitably vary with circumstances. The validity of the choice of policy has to be seen, therefore, against the historical circumstances which happened to prevail at the time. The strategy is consistent with regulation, but also with more liberal policies, depending on the situation confronted. Hecksher quotes a passage from Colbert, the great Minister of Finance in the reign of Louis XIV:

His majesty has long been aware, on account of his great experience, that liberty is the soul of trade and desires that merchants should have complete freedom to do as they wish, that they may be induced to bring thither their foodstuffs and merchandise.⁶⁹

Smith’s assessment of Colbert was that while ‘a man of probity, of great industry and knowledge of detail’, he had ‘unfortunately embraced all the prejudices of the mercantile system, in its nature and essence a system of restraint and regulation, and such as could scarce fail to be agreeable to a laborious and plodding man of business.’⁷⁰Such a judgement lacks a degree of objectivity and is essentially a-historical, in that Smith does not provide the reader with the means of judging the circumstances which Colbert actually confronted. As D. C. Coleman has noted, an ‘understanding of the contemporary economic situation may be a better guide to contemporary recommendations than a criticism of policy’;⁷¹a point echoed by A. V. Judges, writing in the same volume.

In a letter to Andreas Holt, dated October 1780,⁷²Smith himself referred to ‘the very violent attack I had made upon the whole commercial system of Great Britain’ – and the reader will find ample evidence in Book IV of The Wealth of Nations. For example, Smith drew attention to the key role of merchants in defining policy, referring to arguments ‘addressed by merchants to Parliaments, and to the Councils of Princes… by those who were supposed to understand trade, to those who were conscious to themselves that they knew nothing about the matter.’⁷³Elsewhere, Smith consistently drew attention to the pernicious effects of the mercantile interest, to its members’ ‘mean rapacity’ and ‘impertinent jealousy’.⁷⁴

The doctrines which Smith associated with the ‘pretended doctors’ of the system were first, their alleged belief that wealth consisted in money, and second, the associated belief that the purposes of the state could best be secured by attaining a positive balance of trade. Smith dismissed the first thesis as ‘ridiculous’⁷⁵and the doctrine of the positive balance as ‘absurd’.⁷⁶Elsewhere, he referred to ‘that most insignificant object of modern policy, the balance of trade’.⁷⁷He concluded: ‘National prejudice and animosity, prompted always by the private interests of particular traders, are the principles which generally direct our judgment upon all questions concerning it.’⁷⁸It was this prejudice and animosity which prevented France and Great Britain from enjoying the mutual benefits of free trade.⁷⁹Smith’s argument, which echoes that associated with David Hume, had already been forcibly expressed in his Lectures:

From the above considerations it appears that Great Brittain should by all means be made a free port, that there should be no interruptions of any kind to forreign trade… and that free commerce and liberty of exchange should be allowed with all nations, and for all things.⁸⁰

A. W. Coats has recently suggested that even Smith’s admirers have been embarrassed ‘by the decidedly “polemical tone”’ of these sections of The Wealth of Nations, citing Hecksher’s judgement that the whole was ‘an emphatic piece of free trade propaganda’.⁸¹While there is truth in such assessments, and real inadequacies in the account of the mercantile system that Smith provided, nonetheless these sections of The Wealth of Nations are informative with respect to the message which Smith sought to convey.

In addressing the mercantile preoccupation with a positive balance of trade, Smith concluded that ‘Its two great engines, for enriching the country… were restraints upon importation, and encouragement to exportation.’⁸²Smith then proceeded to discuss each of the instruments which could be used to support these objectives, adding in a significant passage,

I shall consider each of them in a particular chapter, and without taking much further notice of their supposed tendency to bring money into the country, I shall examine chiefly what are likely to be the effects of each of them upon the annual produce of its industry. According as they tend either to increase or diminish the value of this annual produce, they must evidently tend either to increase or diminish the real wealth and revenue of the country.⁸³

The true purpose of Smith’s argument was to demonstrate the dangers of regulation in so far as it involved distortion in the use of resources, while also affecting the rate of economic growth:

No regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain. It can only divert a part of it into a direction into which it might not otherwise have gone; and it is by no means certain that this artificial direction is likely to be more advantageous to the society than that into which it would have gone of its own accord.⁸⁴

In Smith’s eyes, regulation is liable to ‘that general objection which may be made to all the different expedients of the mercantile system; the objection of forcing some part of the industry of the country into a channel less advantageous than that in which it would run of its own accord.’⁸⁵It was his emphatic belief that ‘All the different regulations of the mercantile system, necessarily derange more or less this natural and most advantageous distribution of stock.’⁸⁶The language recalls that of the Lectures, where Smith drew attention to the point that intervention with the economic system must disturb the ‘natural balance of industry’ and the ‘natural connection of all trades in the stock’.⁸⁷But in Book IV of The Wealth of Nations, the illustration of the dangers of intervention is offered in the context of two theses which were developed in Books II and III – the first being that the rate of growth would be affected by the area of investment to which a specific injection of capital was applied,⁸⁸and the second that the most natural order of development, and the one which would maximize the opportunities for economic growth, would feature investment in agriculture, manufactures and trade (domestic and foreign) in that order.⁸⁹It was these theses which were to be deployed in Smith’s critique of the centrepiece of the mercantile system – the colonial relationship with America. One of Smith’s most trenchant critics, Governor Pownall of Massachusetts, immediately recognized the central importance of Smith’s views as to the different productivities of specific areas of investment:

In that part, however, which explains the different effect of different employments of capital… I will beg to arrest your steps for a moment, while we examine the ground whereon we tread: and the more so, as I find these propositions used in the second part of your work as data; whence you endeavour to prove, that the monopoly of the colony trade is a disadvantageous institution.⁹⁰

The Colonial Relationship with America

Smith spent the winter of 1766 in London, where he was consulted by Charles Townshend and also made corrections to the third edition of The Theory of Moral Sentiments. By the spring of 1767 he was back in Kirkcaldy to begin a stay of some six years. It was during this period that he struggled to complete The Wealth of Nations, but by 1773 he was ready to return to London, leaving his friends, notably David Hume, under the impression that completion was imminent. As matters turned out, it took Smith almost three more years to complete his study; a delay which may have been due to his increasing interest in the American question. Hume wrote in February 1776 to complain, ‘By all accounts, your book has been printed long ago; yet it has never yet been so much as advertised. What is the reason? If you wait till the fate of America be decided, you may wait long.’⁹¹But the reason for the delay in completion may be simple. Smith may well have perceived that the growing conflict with the colonies possibly revealed a fundamental flaw in mercantilist strategy in the context of an association which had brought the system a degree of ‘splendour and glory which it could never otherwise have attained to’.⁹²

As ‘defence… is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all the commercial regulations of England.’⁹³But in describing the objectives of colonial policy, Smith concentrated mainly on its economic aspects, and duly reported on the extensive range of restrictions which Britain had imposed on trade and manufactures, domestic as well as American. To begin with, the Navigation Acts required trade between the colonies and Great Britain to be carried on in British ships, while certain classes of commodities were to be confined initially to the market of the mother country. The so-called ‘enumerated’ goods were of two types: those that were either the peculiar produce of America or were not produced in Britain; and those that were produced in Britain but in insufficient quantities to meet domestic demand. Examples of the first type were sugar, coffee and tobacco; of the second, naval stores, masts, pig iron and copper.

The first broad category of goods could not harm British industry, and here the object of policy, as reported by Smith, was to ensure that British merchants could buy cheaper in the colonies with a view to supplying other countries at higher prices and at the same time establishing a useful carrying trade. In the second case the objectives were to ensure essential supplies and, through the careful use of duties, to discourage imports from other countries with which the balance of trade was supposed to be unfavourable.

Smith also took notice of another feature of British policy, namely that the production of the more ‘advanced or more refined manufactures’ was discouraged in the colonies.⁹⁴Thus woollen manufactures were forbidden; and although the colonists were encouraged to export pig iron, they were prevented from erecting slit-mills, which might have led ultimately to the development of manufactures competitive with those of Great Britain.

There was a certain ingenuity in these arrangements (no doubt, as Smith suggests, as much the product of accident as design), in that the colonial relationship could be seen to benefit both parties, at least in the short run. The relationship with the colonies, as defined by the Navigation Acts, had the effect of creating a self-supporting economic unit whose main components provided complementary markets for each others’ products, and in addition helped to minimize gold flows abroad.⁹⁵By the same token, the colonial relationship gave Britain access to strategic materials and thus contributed to national defence,⁹⁶through the encouragement of the merchant navy.

Smith argued that there were considerable opportunities for economic growth within the framework of the colonial relationship. He placed most emphasis on American experience and drew attention to a number of factors that helped to explain America’s rapid rate of expansion, for example, the economic situation of the colonial territories: ‘A new colony must always for some time be more under-stocked in proportion to the extent of its territory, and more under-peopled in proportion to the extent of its stock, than the greater part of other countries.’⁹⁷This meant that the rates of both wages and profits were likely to be high, thus contributing to a level of activity that explained the ‘continual complaint of the scarcity of hands in North America. The demand for labourers, the funds destined for maintaining them, increase, it seems, still faster than they can find labourers to employ.’⁹⁸

Smith also argued that the legislative arrangements governing trade with the mother country had contributed most materially to colonial development, even though that had not always been the motive behind them. He drew attention to the fact that ‘the most perfect freedom of trade is permitted between the British colonies of America and the West Indies’, thus providing a ‘great internal market’ for their products.⁹⁹In addition, the relative freedom of trade in non-enumerated commodities provided a further market for the primary products involved, while Britain also gave preferential treatment to American goods that were confined to its own domestic market, and provided a large European market (albeit indirectly) for the enumerated items: goods such as tobacco, for example, that were largely re-exported.

Taken as a whole, the colonial policy had the effect of encouraging agriculture, which Smith considered ‘the proper business of all new colonies; a business which the cheapness of land renders more advantageous than any other’.¹⁰⁰This point is of great importance since, on Smith’s argument, agriculture was the most productive of all forms of investment, capable of generating large surpluses that could sustain further growth. Indeed, Smith argued that the restrictions imposed on the introduction of manufactures had benefited the colonies by ensuring that they bought from the cheaper European markets and therefore avoided diverting any part of their available capital into less productive employments such as manufactures.¹⁰¹There is no doubt as to the buoyancy of Smith’s tone in describing the growth rate of North America: ‘though North America is not yet so rich as England, it is much more thriving, and advancing with much greater rapidity to the further acquisition of riches’.¹⁰²

Yet it cannot be said that Smith minimized the benefits to Britain from the standpoint of economic growth. He pointed out that Britain (together with its neighbours) had as a matter of fact acquired, through the control of the colonies, a ‘new and inexhaustible market’ that had given occasion to ‘new divisions of labour and improvement of art’. Smith’s assertion of the benefits accruing to Great Britain as a result of the colonial relationship reflects his own grasp of the gains from trade.¹⁰³

Taken as a whole, Smith’s argument seems designed to suggest that for a time at least the colonial relationship had contributed to, and proved compatible with, a relatively high rate of growth in both the colonies and the mother country. The relationship between mother country and colonies is represented as beneficial to the two parties, with regard to both the politico-economic objectives of the Navigation Acts and the stimulus given to economic growth.

THE CONTRADICTIONS

But Smith believed that there were contradictions inherent in the colonial relationship which must begin to manifest themselves over time. For example, while he took pains to emphasize the great stimulus given to economic growth in the colonies, he also pointed out that the high and rapid rate of growth they had attained must ultimately conflict with the restrictions imposed on colonial trade and manufactures, restrictions that could be regarded as the ‘principal badge of their dependency’ and as a ‘manifest violation of one of the most sacred rights of mankind’.¹⁰⁴He also pointed out, ‘In their present state of improvement, those prohibitions, perhaps, without cramping their industry, or restraining it from any employment to which it would have gone of its own accord, are only impertinent badges of slavery… In a more advanced state they might be really oppressive and insupportable’.¹⁰⁵Smith believed that in the long run some change must come in the colonial relationship for the reason just stated, although he did place most emphasis on the more immediate problems faced by Britain itself.

So far as Great Britain was concerned, Smith contended that although ‘the colony trade’ was ‘upon the whole beneficial, and greatly beneficial’,¹⁰⁶the rate of growth was necessarily less than it would have been in the absence of the Navigation Acts. He believed that ‘if the manufactures of Great Britain… have been advanced, as they certainly have, by the colony trade, it has not been by means of the monopoly of that trade, but in spite of the monopoly.¹⁰⁷

Smith advanced a number of points in support of this contention. First, he suggested that the monopoly of the colony trade had inevitably increased the volume of business to be done by a relatively limited amount of British capital and, therefore, the prevailing rate of profit. He argued that high rates of profit would affect the improvement of land and the frugality of the merchant classes, while also ensuring that available capital would be partly drawn, and partly driven, from those trades where Britain lacked the monopoly (that is, drawn by the higher profits available in the colony trade and driven from them by a poorer competitive position).

Smith especially emphasized that the pattern of British trade had been altered in such a way that its manufactures, ‘instead of being suited, as before the act of navigation, to the neighbouring market of Europe, or to the more distant one of the countries which lie round the Mediterranean sea, have, the greater part of them, been accommodated to the still more distant one of the colonies.’¹⁰⁸Smith’s point was that the existing legislation had drawn capital from trades carried on with a near market (Europe) and diverted it to trade carried on with a distant market (America), while forcing a certain amount of capital from a direct to an indirect foreign trade: all with consequent effects on the rate of return, the employment of productive labour and, therefore, the rate of economic growth. He added that the pattern of British trade had been altered in such a way as to make Britain unduly dependent on a single (though large) market.¹⁰⁹

In sum, the colonial relationship was compatible with a high rate of growth in America, but also produced a sub-optimal rate of growth as far as Great Britain was concerned. Smith roundly asserted that ‘the present system of management’ ensured that Britain derived nothing but loss from the dominion assumed over the colonies and that current costs exceeded the profits actually gained. Looked at from this point of view, the colonial policy emerged as essentially contradictory, at least in the long run, and as attractive only to the ‘undiscerning eye of giddy ambition’.¹¹⁰

Smith’s account of the problem currently facing Great Britain was largely dominated by fiscal need. In Smith’s opinion, Britain’s needs seemed to be growing more rapidly than her resources, and he noted in this connection that by January 1775 the national debt had reached the then astronomical figure of £130 million (absorbing £4.5 million in interest charges), much of which was due to the acquisition of the colonial territories. This was a matter of some moment. It meant that a country whose rate of growth had been adversely affected by the colonial relationship had to face a large and probably growing tax burden, which would itself affect the rate of economic expansion, and thus compound the problem. In Smith’s view,

The rulers of Great Britain have, for more than a century past, amused the people with the imagination that they possessed a great empire on the west side of the Atlantic. This empire, however, has hitherto existed in imagination only. It has hitherto been, not an empire, but the project of an empire… If the project cannot be completed, it ought to be given up. If any of the provinces of the British empire cannot be made to contribute towards the support of the whole empire, it is surely time that Great Britain should… endeavour to accommodate her future views and designs to the real mediocrity of her circumstances.¹¹¹

THE SOLUTION

Yet Smith believed that the project of empire could be completed. He also believed that Britain both could and should tax the colonies, partly as a means of relief from the growing burden of the national debt and partly as a means of making the colonies pay for the benefits received from the imperial connection.¹¹²He concluded that the British Government should extend the British system of taxation to all the colonies. The concluding sections of The Wealth of Nations are largely concerned with the technical problems of this aspect of harmonization. Smith saw no reason to suppose that the major British taxes (land tax, stamp duties, customs and excise) could not be successfully applied to both America and Ireland. He added that such a change of policy should be accompanied by freedom of trade between all parts of the [western] empire and, most dramatically, that it would require a form of union which would give the colonies representation in the British Parliament and in effect create a single state.¹¹³Indeed, Smith believed that

there is not the least probability that the British constitution would be hurt by the union of Great Britain with her colonies. That constitution, on the contrary, would be completed by it, and seems to be imperfect without it. The assembly which deliberates and decides concerning the affairs of every part of the empire, in order to be properly informed, ought certainly to have representatives from every part of it.¹¹⁴

The case for union depended on Smith’s acceptance of the constitutional ‘rule’ that there should be no taxation without representation, but it is chiefly remarkable for its basis in economic factors. This emphasis also affected Smith’s judgement as to the future course of events. In his view, the progress of the colonies had been, and would continue to be, such that

in the course of little more than a century, perhaps, the produce of American might exceed that of British taxation. The seat of the empire would then naturally remove itself to that part of the empire which contributed most to the general defence and support of the whole.¹¹⁵

The idea of union was quite widely supported and dates back at least to Benjamin Franklin’s Albany Plan of 1754. But by the time The Wealth of Nations was published, the opportunity had been lost. Smith’s tone had further hardened by the time he wrote his ‘Memorandum on the American War’ for the benefit of the Solicitor-General, Alexander Wedderburn, in 1778. He advised Wedderburn that the proposal no longer attracted the support of American opinion. In Britain, he wrote, the plan ‘seems not to be agreeable to any considerable party of men’. He concluded, sadly, that ‘The plan which, if it could be executed, would certainly tend most to the prosperity, to the splendour, and to the duration of the empire, if you except here and there a solitary philosopher like myself, seems scarce to have a single advocate.’¹¹⁶

It is interesting to note that Smith viewed the loss of the western empire with regret and that he was able to conclude that his economic analysis of the colonial relationship was vindicated by the peace of 1783. In a new chapter added to the third edition, published in the same year, Smith wrote that ‘It is unnecessary, I apprehend, to say anything further, in order to expose the folly of a system which fatal experience has now sufficiently exposed.’¹¹⁷Although Smith was no doubt correct in his judgement that in the long run the restrictions on American trade and manufactures would become the crucial issue, the regulating acts of trade and navigation were not the immediate cause of the conflict. Neither the Declaration of Colonial Rights and Grievances, nor the Declaration of Independence, which included a comprehensive indictment of British policy, contain any critical reference to the acts whose content and consequences lie at the heart of Smith’s beautifully constructed critique of colonial policy.¹¹⁸

PUBLIC WORKS AND SERVICES

One of the major themes developed in Smith’s Lectures and in The Wealth of Nations was the defence of freedom of economic choice. In a telling passage he called upon the sovereign to discharge ‘himself’ from a duty ‘in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society.’¹¹⁹This theme is illustrated in Book I, where Smith voiced his objection to monopoly powers and to such institutions as the Statute of Apprenticeship (which controlled the supply of labour) and the Laws of Settlement (which made each parish responsible for its own poor and so limited mobility). He believed that the restrictions imposed by these institutions were unjust in the sense that they were a violation of ‘this most sacred property which every man has in his own labour’,¹²⁰but also that they were ‘impolitic’ in the sense that they artificially constrained the free movement of resources between employments and different geographical areas. Thesametheme is developed in BookII, where Smith was concerned with the macro-economic dimension and the key issue of economic growth. Book IV widens the discussion still further, as we have seen, to include a general critique of economic regulation as manifested in the mercantile system.

Since Smith was very much in favour of dismantling controls which reflected past experience or current policy, he did not of course favour the regulation of markets. Indeed one of the most informative illustrations of this truth is to be found in the ‘Digression Concerning the Corn Trade’.¹²¹The argument is part of the logical extension of Smith’s position and is marked by the claim that ‘The unlimited, unrestrained freedom of the corn trade, as it is the only effective preventative of the miseries of a famine, so it is the best palliative of the inconveniences of a dearth.’¹²²But this is not to say that Smith was opposed to all forms of regulation, believing as he did that

those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical.¹²³

The classic examples are provided by Smith’s willingness to regulate the issue of small-denomination banknotes in the interests of a stable banking system. To those who objected, he replied that ‘the obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.’¹²⁴But Smith’s recommendation that the rate of interest should be controlled ¹²⁵to offset the influence of ‘prodigals and projectors’ drew criticism from both Jeremy Bentham and Dugald Stewart for being inconsistent with his general position.¹²⁶

Book V further extends the argument, in discussing the positive role of the state. There are two dimensions to Smith’s argument: first, the treatment of those services without which society could not subsist, and second, the analysis of the need to establish services ‘of such a nature, that the profit could never repay the expence to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain’.¹²⁷While the two cases are distinct, they are linked by a common emphasis on the problems of market failure, and by certain principles of public finance. Smith typically explains the nature of each service and why it is required. He also argues that, wherever possible, public services should be paid for by those who benefit from them (although not necessarily at an economic rate) and that they should be organized in such a way as to ensure efficient delivery – the problem of induced efficiency.

Defence

The treatment of defence is clearly related to Smith’s discussion of the stages of history in Book V,¹²⁸an important part of the argument being that a gradual change in the economic and social structure had necessitated the formal provision of an army. In this context, the form of economic organization, the greater complexity of modern war ¹²⁹and the high costs associated with the introduction of firearms led to a situation where the ‘wisdom of the state’¹³⁰must arrange for provision.

Of the options open to government, Smith preferred a standing army to a militia, judging it likely to be more effective, while admitting the political dangers which such armies present.¹³¹Having determined the preferred form of organization, Smith concluded that this essential service would have to be paid for. Since the expense involved was laid out ‘for the benefit of the whole society’ it ought to be defrayed ‘by the general contribution of the whole society, all the different members contributing, as nearly as possible, in proportion to their respective abilities’.¹³²(The canons of taxation are discussed in Book IV, Chapter 2.)

Justice

As far as the organization of the essential service of justice is concerned, it was Smith’s contention that the separation of the judicial from the executive power was a basic prerequisite for effective and equitable provision.¹³³However, Smith’s efficiency criteria are clearly distinguished from the basic issue of organization, his argument being, in effect, that the services provided by attorneys, clerks or judges should be paid for in such a way as to encourage productivity. Indeed, Smith ascribed the ‘present admirable constitution of the courts of justice in England’ to the use of a system of court fees which had served to encourage competition between the Courts of King’s Bench, Chancery and Exchequer.¹³⁴A further interesting and typical feature of the discussion is found in Smith’s argument that although justice is a service to the whole community, the costs of handling specific causes should be paid for by those who give occasion to, or benefit from, them. He therefore concluded that the ‘expense of the administration of justice… may very properly be defrayed by the particular contribution of one or other, or both of those two different sets of persons, according as different occasions may require, that is, by the fees of court’,¹³⁵rather than by a charge on the general funds.

Public Works

As in the case of justice, Smith considered that public works such as highways, bridges and canals should be paid for by those who use them and in proportion to the wear and tear occasioned. He argued that the consumer who pays the charges generally gains more from the cheapness of carriage than he loses in the charges incurred:

The person who finally pays this tax, therefore, gains by the application, more than he loses by the payment of it. His payment is exactly in proportion to his gain. It is in reality no more than a part of that gain which he is obliged to give up in order to get the rest. It seems impossible to imagine a more equitable method of raising a tax.¹³⁶

Smith also defended the principle of direct payment on the grounds of efficiency. Only by this means, he contended, would it be possible to ensure that services are provided where there is a recognizable need.¹³⁷

Smith further argued that while governments must be responsible for establishing major public works, care should be taken to ensure that services were administered by such bodies, or under such conditions, as made it in the interest of individuals to do so effectively.¹³⁸Smith tirelessly emphasized the point, already noticed in the discussion of justice, that in every trade and profession ‘the exertion of the greater part of those who exercise it, is always in proportion to the necessity they are under of making that exertion’.¹³⁹He therefore approved of the expedient used in France, whereby a construction engineer was made a present of the tolls on a canal for which he had been responsible – thus ensuring that it was in his interest to keep the canal in good repair. In fact, Smith used a number of such devices, advocating, for example, that the administration of roads would have to be handled in a different way from canals because they are passable even when full of holes. Here he suggested that the ‘wisdom of parliament’ would have to be applied to the appointment of proper persons, with ‘proper courts of inspection’ for ‘controuling their conduct, and for reducing the tolls to what is barely sufficient for executing the work to be done by them’.¹⁴⁰

Education

The provision of education represents the fourth major division of Smith’s treatment of public services. This, of course, is a subject which is still topical today. There are echoes in Smith’s analysis here of his earlier Theory of Moral Sentiments. This discussion of education also significantly extends his views as to the appropriate organization of any public service.

Adam Smith recognized that education was important in its own right. But in Book V he also claimed that education could be the means of offsetting the debilitating effects of the division of labour. In Book I, Smith had argued that the division of labour helped to explain the superior productivity of labour in modern times and the greater command of the material requisites of well-being which the modern citizen enjoyed as compared to his savage counterpart. Readers of Book I may recall the famous claim

that the accommodation of an European prince does not always so much exceed that of an industrious and frugal peasant, as the accommodation of the latter exceeds that of many an African king, the absolute master of the lives and liberties of ten thousand naked savages.¹⁴¹

But by way of qualification, Smith later observed,

In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations: frequently to one or two. But 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… has no occasion to exert his understanding, or to exercise his invention… 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.¹⁴²

Looked at in this way, the savage is in fact better off than many of his modern counterparts; an important reminder of the point that welfare cannot only be measured in material terms.

What Robert Heilbroner has called the ‘dark side’ of The Wealth of Nations has profound implications.¹⁴³Smith had argued at an earlier stage that

A great part of the machines made use of in those manufactures in which labour is most subdivided, were originally the invention of common workmen, who, being each of them employed in some very simple operation, naturally turned their thoughts towards finding out easier and readier methods of performing it.¹⁴⁴

But Smith is now suggesting that the flow of invention and of technical change associated with the division of labour in production may be adversely affected by it.

Smith’s account of the consequences of ‘mental mutilation’¹⁴⁵helps to explain the decline in martial spirit in advanced societies, and also serves to suggest that the division of labour may adversely affect man’s capacity for moral judgement:

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.¹⁴⁶

The link with the analysis of the ‘means by which’ we form judgements concerning what is fit and proper to be done or avoided, as elaborated in The Theory of Moral Sentiments, is obvious. So too is Smith’s judgement that economic development may contribute to limit our capacity for moral judgement, especially as it affects the man of ‘low condition’.¹⁴⁷

While he remains in a country village his conduct may be attended to, and he may be obliged to attend to it himself. In this situation, and in this situation only, he may have what is called a character to lose. But as soon as he comes into a great city, he is sunk in obscurity and darkness.¹⁴⁸

To offset these tendencies, Smith modified his earlier treatment of productive and unproductive labour in suggesting that the state should encourage ‘all those who for their own interest would attempt, without scandal or indecency, to amuse and divert the people by painting, poetry, music, dancing; by all sorts of dramatic representations and exhibitions’.¹⁴⁹It was in this context that he also advocated military education,¹⁵⁰and other forms of instruction. He believed that ‘the most essential parts of education… to read, write and account, can be acquired at so early a period of life, that the greater part even of those who are to be bred to the lowest occupations, have time to acquire them.’¹⁵¹He added:

The public can impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education, by obliging every man to undergo an examination or probation in them before he can obtain the freedom in any corporation, or be allowed to set up any trade either in a village or town corporate.¹⁵²

Smith advocated that the poor should be encouraged to act in this way since they typically lack either incentive or inclination to provide an education for their children. The poor, he observed, have little time to spare for education; as soon as children ‘are able to work, they must apply to some trade by which they can earn their subsistence’.¹⁵³In a telling passage in his Lectures on Jurisprudence, Smith noted that ‘a boy of six or seven years of age at Birmingham can gain this threepence or sixpence a day, and parents find it to be in their interest to set them soon to work. Thus their education is neglected.’¹⁵⁴The problem is again, in part, one of market failure.

Smith also confirmed the importance of an educated middling and higher rank, on the grounds that their influence would contribute to ensure a degree of social stability in a context where the lower orders might well be subject to the delusions of superstition and enthusiasm. For Smith, an important remedy was to be found in

the study of science and philosophy, which the state might render almost universal among all people of middling or more than middling rank and fortune… by instituting some sort of probation, even in the higher and more difficult sciences, to be undergone by every person before he was permitted to exercise any liberal profession, or before he could be received as a candidate for any honourable office of trust or profit… Science is the great antidote to the poison of enthusiasm and superstition; and where all the superior ranks of people were secured from it, the inferior ranks could not be much exposed to it.¹⁵⁵

Smith’s preference was probably for the classical programme of physics, moral philosophy and logic.¹⁵⁶

It was Smith’s contention, as we have seen, that the beneficiary of a service should be expected to pay for it. Clearly, education, whether elementary or advanced, confers a benefit upon the individual. But there is also a benefit to the state. Smith had argued in Book II that the fixed capital of any society must include

the acquired and useful abilities of all the inhabitants or members of the society. The acquisition of such talents, by the maintenance of the acquirer during this education, study, or apprenticeship, always costs a real expense, which is capital fixed and realised, as it were, in his person. Those talents, as they make a part of his fortune, so they do likewise of that of the society to which he belongs.¹⁵⁷

Smith also noted, on political grounds, that

An instructed and intelligent people besides are always more decent and orderly than an ignorant and stupid one. They feel themselves, each individually, more respectable, and more likely to obtain the respect of their lawful superiors, and they are therefore more disposed to respect those superiors. They are more disposed to examine, and more capable of seeing through, the interested complaints of faction and sedition, and they are, upon that account, less apt to be misled into any wanton or unnecessary opposition to the measures of government. In free countries, where the safety of government depends very much upon the favourable judgment which the people may form of its conduct, it must surely be of the highest importance that they should be not be disposed to judge rashly or capriciously concerning it.¹⁵⁸

Smith’s position as to payment was necessarily somewhat ambiguous.

The expense of the institutions of education and religious instruction is beneficial to the whole society, and may, therefore, without injustice, be defrayed by the general contribution of the whole society. This expense, however, might perhaps with equal propriety, and even with some advantage, be defrayed altogether by those who received the immediate benefit of such education and instruction or by the voluntary contribution of those who think they have occasion for either the one or the other.¹⁵⁹

It seems likely that Smith would have supported a combination of a modest private, and a more significant public contribution over the whole education system. This brings us once again to the issue of induced efficiency. In terms of elementary education, Smith supported the establishment of schools on the Scottish model, ‘where children may be taught for a reward so moderate, that even a common labourer can afford it’, and commented, in a characteristic passage, that the master should be ‘partly, but not wholly paid by the publick; because if he was wholly, or even principally paid by it, he would soon learn to neglect his business’.¹⁶⁰

But perhaps the most intriguing aspect of Smith’s argument is the emphasis which he gives to the performance of the university teacher, and his insistence that income should always be related to the capacity to attract and to sustain student numbers:

In some universities the salary makes but a part, and frequently but a small part of the emoluments of the teacher, of which the greater part arises from the honoraries or fees of his pupils. The necessity of application, though always more or less diminished, is not in this case entirely taken away. Reputation in his profession is still of some importance to him, and he still has some dependency upon the affection, gratitude, and favourable report of those who have attended upon his instructions; and these favourable sentiments he is likely to gain in no way so well as by deserving them, that is, by the abilities and diligence with which he discharges every part of his duty.¹⁶¹

This is an interesting statement when we consider the emphasis which Smith gave to the point that all our actions are subject to the scrutiny of our fellows, together with the stress which he placed (in The Theory of Moral Sentiments) on our natural desire not just to be praised, but to be praiseworthy. However, as the statement just quoted, and indeed the whole tenor of the discussion suggests, Smith believed that the diligence of the teacher can only be relied on where the stated efficiency criteria are met.

But while Smith’s treatment of education confirms his earlier argument that people who supply public services should be paid in such a way as to induce efficiency delivery, he went further in enunciating principles which have a wider application. First, he argued that public bodies (such as universities) should not, ideally, have a monopoly of the services which they provide.¹⁶²Secondly, he suggested that public bodies should be so placed as to be able to compete effectively in the labour market for appropriate services.¹⁶³Thirdly, he drew attention to the dangers of self-government,¹⁶⁴and fourthly, to the need for freedom of choice on the part of the customer.¹⁶⁵He also recognized that there could be circumstances under which external scrutiny could be needed, while warning that

The person subject to such jurisdiction is necessarily degraded by it… It is by powerful protection only that he can effectually guard himself against the bad usage to which he is at all time exposed; and this protection he is most likely to gain, not by ability or diligence in his profession, but by obsequiousness to the will of his superiors, and by being ready, at all times, to sacrifice to that will the rights, the interest, and the honour of the body corporate of which he is a member.¹⁶⁶

Government and Constraint

Perhaps I have said enough now to support Lionel Robbins’ judgement that Smith’s advocacy of economic freedom ‘rested on a two-fold basis: belief in the desirability of freedom of choice for the consumer, and belief in the effectiveness, in meeting this choice, of freedom on the part of the producers’.¹⁶⁷At the same time, my account of key aspects of Books IV and V is designed to confirm Jacob Viner’s definitive assessment of Smith’s position:

Adam Smith was not a doctrinaire advocate of laissez-faire. He saw a wide and elastic range of activity for government, and he was prepared to extend it even further if government, by improving its standard of competence, honesty and public spirit, showed itself entitled to wider responsibilities.¹⁶⁸

This passage reminds us of Smith’s preoccupation with what he took to be the baleful influence of mercantile and manufacturing interests, and also of a further link with the historical analysis of the emergence of the exchange economy.

Smith associated the fourth economic stage with the advent of freedom in the ‘present sense of the term’: that is, with the elimination of the relationship of direct dependence which had been a characteristic of the feudal/agrarian period. Politically, the significant and associated development appeared to be the diffusion of power that followed the emergence of new forms of wealth, which, at least in the particular circumstances of England, had been reflected in the increased significance of the House of Commons and in the emergence of a situation where liberty was secured ‘by an assembly of the representatives of the people, who claim the sole right of imposing taxes’.¹⁶⁹Smith was far from equating political with personal liberty, nor did he suggest that absolutism was incompatible with the fourth economic stage. But what he did seem to recognize was that ‘free governments’, especially of the kind which had been confirmed by the English Revolution Settlement, now operated within a relatively sensitive political and economic environment. It is interesting to note, for instance, how often Smith referred to the constraints presented by the ‘confirmed habits and prejudices’ of people, and to the necessity of adjusting legislation to what ‘the interest, prejudices, and temper of the times would admit of’.¹⁷⁰Secondly, Smith makes the point that while all governments are subject to the above constraints in some degree, ‘free’ governments are likely to be particularly sensitive to public opinion. He made this point quite explicitly in the ‘Memorandum on the American War’, written in 1778, where he commented on the limited options open to a government which even ‘in times of the most profound peace, of the highest public prosperity, when the people had scarce even the pretext of a single grievance to complain of, has not always been able to make itself respected by them’.¹⁷¹Thirdly, Smith drew attention to the fact that the government itself was a complex instrument. In this connection he felt that the management of Parliament through the distribution of offices was ‘a necessary feature of the British mixed government’;¹⁷²a point which is in turn linked to the fact that the pursuit of office was itself a ‘dazzling object of ambition’; a competitive game with as its object the attainment of ‘the great prizes which sometimes come from the wheel of the great state lottery of British politicks’.¹⁷³This point leads on to another which was greatly emphasized by Smith, namely that the same economic forces which had served to elevate the House of Commons to a superior degree of influence had also served to make it an important focal point for sectional interests.

Smith recognizes in The Wealth of Nations that the landed, monied, manufacturing and mercantile groups all constitute special interests which could impinge on the working of government. Smith referred frequently to their ‘clamorous importunity’, and in speaking of the growth of monopoly pointed out that government policy ‘has so much increased the number of some particular tribes of them, that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature’.¹⁷⁴Smith thus insisted that any legislative proposals emanating from this class

ought always to be listened to with the greatest precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the publick, who have generally an interest to deceive and even to oppress the publick, and who accordingly have, upon many occasions, both deceived and oppressed it.¹⁷⁵

Important as the role of government may be, Smith was clearly aware of the pressures operating upon an imperfect instrument, operating in an imperfect environment.

For all these reasons, Smith, ever the pragmatist, concluded:

To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it.¹⁷⁶

Later he was to comment, in a passage critical of Quesnay, that if ‘a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered.’¹⁷⁷

1723	Born Kirkcaldy, Scotland, and baptized on 5 June: the son of Adam Smith, Clerk of the Court Martial and Comptroller of Customs, and of Margaret Douglas of Strathendry.
1731	Entered the Burgh School, Kirkcaldy.
1735–7	George, Bishop Berkeley, The Querist.
1737–40	Attended the University of Glasgow.
1740–46	Snell Exhibitioner, Balliol College, Oxford.
1748	Baron de Montesquieu, De l’esprit des lois.
1748–51	Delivered a course of lectures in the city of Edinburgh.
1749	Josiah Tucker, A Brief Essay on the Advantages and Disadvantages which respectively attend France and Great Britain with regard to Trade.
1751	Elected to the Chair of Logic at Glasgow University.
1752	Translated to the Chair of Moral Philosophy at Glasgow University. David Hume, Political Discourses.
1754	François Forbonnais, ÉIéments du commerce.
1755	Richard Cantillon, Essai sur la nature du commerce en générale.
1757	Victor Riquetti, Marquis de Mirabeau, L’Ami des hommes, ou traité de la population.
1758	François Quesnay, Tableau économique.
1759	First edition of The Theory of Moral Sentiments.
1760	Joshua Gee, The Trade and Navigation of Great Britain Considered.
1761	Second edition of The Theory of Moral Sentiments; publication of the ‘Considerations Concerning the First Formation of Languages’ in the Philological Miscellany.
1763	The Treaty of Paris, concluding the Seven Years War with France. Victor Riquetti, Marquis de Mirabeau, with François Quesnay, Philosophie rurale, ou économie générale et politique de l’agriculture, pour servir de suite à l’Ami des hommes.
1764	Resigned his Chair at Glasgow University.
	The American Sugar Act.
1764–6	*Travelling tutor to the Duke of Buccleuch, mainly in France, where he met the leading philosophes* and the French economists.**
1765	The American Stamp Act.
	William Mildmay, Laws and Policy of England.
1766	Repeal of the American Stamp Act.
	Charles Smith, Three Tracts on the Corn Trade and
	Corn Laws (second edition).
	A. R. J. Turgot, Reflections on the Formation and
	Distribution of Riches.
1766–73	*Resident in Kirkcaldy, working on The Wealth of Nations.*
1767	Resident in London; publiction of the third edition of the Theory.
	The Townshend Revenue Acts.
	François Forbonnais, Principes et observation économ
	iques (1767).
	Mercier de la Rivière, L’Ordre naturel et essentiel des
	sociétés politiques (1767).
	Sir James Steuart, Principles of Political Economy (1767).
1768	Colonial non-Importation Agreements.
	Pierre Samuel Dupont de Nemours (ed.), Physiocratie.
	Guillaume François Le Trosne, Recueil de plusieurs morceaux économiques.
1770	The Boston Massacre.
1771	Charles D’Avenant (ed. Charles Whitworth), Political and Commercial Works.
1773	The Boston Tea Party.
1773–6	*Resident in London. Publication of the fourth edition of the Theory, 1774. Publication of The Wealth of Nations* on 9 March 1776.**
1774	Declaration of Colonial Rights and Grievances by the Continental Association.
1775	Battles of Lexington and of Bunker (Breed’s) Hill; the Olive Branch Petition.
	Jacques Necker, Sur la législation et le commerce des grains.
1776	Declaration of Independence, 4 July; Battle of Trenton.
	Abbé Étienne Bonnot de Condillac, Le commerce et le gouvernement.
1777	Battles of Princeton and Saratoga.
1778	*Appointed Commissioner of Customs; second edition of The Wealth of Nations; resident in Edinburgh.*
	American Treaty of Alliance with France.
1781	British capitulation at Yorktown.
1783	Treaty of Paris, concluding the American War of
	Independence.
1784	*Publication of the third edition of The Wealth of Nations.*
1786	*Publication of the fourth edition of The Wealth of Nations.*
1787	Elected as Lord Rector of Glasgow University.
	Jeremy Bentham, Defence of Usury.
1789	*Publication of the fifth edition of The Wealth of Nations.*
1790	*Publication of the sixth edition of The Theory; died on 17 July.*

‘Astronomy’	Adam Smith, ‘The History of Astronomy’, edited by W. P. D.
	Wightman, included in EPS.
Corr	Adam Smith, Correspondence, Glasgow Edition, edited by E. C.
	Mossner and I. S. Ross (Oxford, second edition 1987). References give the number of the letter, as listed in the Glasgow Edition, and its date.
EPS	Adam Smith, Essays on Philosophical Subjects, Glasgow Edition, general editors D. D. Raphael and A. S. Skinner (Oxford, 1980).
Lectures	Adam Smith, Lectures on Jurisprudence (Reports of 1762–3 and 1766), Glasgow Edition, edited by R. L. Meek, D. D. Raphael and P. G. Stein (Oxford, 1978). References give the page number of the original manuscript, as shown in the Glasgow Edition.
Meek (1962)	R. L. Meek, The Economics of Physiocracy (1962).
Meek (1973)	R. L. Meek, Turgot on Progress, Sociology and Economics (1973).
Stewart	Dugald Stewart, ‘Account of the Life and Writings of Adam Smith’, edited by I. S. Ross, included in EPS.
TMS	Adam Smith, The Theory of Moral Sentiments, Glasgow Edition, edited by D. D. Raphael and A. L. Macfie (Oxford, 1976).
WN	Adam Smith, The Wealth of Nations, Glasgow Edition, edited by R. H. Campbell, A. S. Skinner and W. B. Todd (Oxford, 1976).

The Wealth of Nations
BOOKS IV–V

THE WEALTH OF NATIONS

CONTENTS

PREFACE

ADAM SMITH

KEY DATES, AND SOME CONTEMPORARY
PUBLICATIONS

ABBREVIATIONS

INTRODUCTION

THE MERCANTILE SYSTEM

THE WEALTH OF NATIONS

The Wealth of NationsBOOKS IV–V

CONTENTS

PREFACE

ADAM SMITH

KEY DATES, AND SOME CONTEMPORARYPUBLICATIONS

ABBREVIATIONS

INTRODUCTION

THE MERCANTILE SYSTEM

The Wealth of Nations
BOOKS IV–V

KEY DATES, AND SOME CONTEMPORARY
PUBLICATIONS