Adam Smith, the Wealth of Nations (1776): on Free-Market Economics1

Primary Source 11.1

ADAM SMITH, THE WEALTH OF NATIONS (1776): ON FREE-MARKET ECONOMICS1

In the seventeenth and eighteenth centuries, Europeans accumulated vast useful knowledge relating to science, political administration, technology, and the best economic and trade practices. Applying scientific approaches to these data, scholars and thinkers devised theories of economic development. Since long-term economic growth had never occurred and people’s standards of living had never perceptibly and consistently risen, it had previously made little sense to formulate such theories. Only in early modern Europe, where scientific thinking was gradually applied to all human endeavors and a commercial revolution yielded sustained economic growth, did systematic economic thought emerge. Adam Smith (1723–90), a Scottish philosopher, economist, and political thinker, in An Inquiry into the Nature and Causes of the Wealth of Nations (1776), scrutinized the three principal economic theories or philosophies of his time. The first, Mercantilism, discussed in Primary Source 9.3, argued that fostering a positive balance of trade was the key to national wealth. The second, called Physiocracy or the “agricultural system,” developed in France in direct opposition to the first. (For Smith’s analysis of Physiocracy, click here.) Never actually implemented by any government, it contended that all wealth stems from the land and that commercial activity is merely derivative and even “unproductive.” Smith rejected both theories in favor of what today is known as free-market economics. This philosophy holds that money and precious metals are merely a convenient means of exchange and not true wealth. While he concurred in emphasizing the enormous contributions of agriculture to national wealth, he considered the totality of economic output of any country the true measure of its wealth. He asserted further that economic actors (anyone who buys or sells anything) will tend to produce wealth more efficiently—and in fact will contribute more to the general good—if governments will let economic activity follow its natural course—via laissez-faire (“let it alone”) policies—concentrating instead on defending society from external attack and from domestic criminality and by providing necessary social services. For the full text online, click here. For a freely accessible audio recording, click here.

BOOK IV. OF SYSTEMS OF POLITICAL ECONOMY.

INTRODUCTION.

Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign.

1 Adam Smith, An Inquiry into the Nature and Causes of Wealth of Nations (London: T. Nelson and Sons, 1852), 173, 192, 202–3, 221, 244–45, 247, 248, 249, 274, 285–86. 2

The different progress of opulence in different ages and nations has given occasion to two different systems of political economy with regard to enriching the people. The one may be called the system of commerce, the other that of agriculture. I shall endeavour to explain both as fully and distinctly as I can, and shall begin with the system of commerce. It is the modern system, and is best understood in our own country and in our own times.

CHAPTER III. OF THE EXTRAORDINARY RESTRAINTS UPON THE IMPORTATION OF GOODS OF AMOST ALL KINDS, FROM THOSE COUNTRIES WITH WHICH THE BALANCE IS SUPOSED TO BE DISADVANTAGEOUS.

Part I.—Of the Unreasonableness of those Restraints even upon the Principles of the Commercial System.

To lay extraordinary restraints upon the those particular countries with which the importation of goods of almost all kinds from balance of trade is supposed to be disadvantageous, is the second expedient by which the commercial system proposes to increase the quantity of gold and silver. Thus in Great Britain, Silesia lawns2 may be imported for home consumption upon paying certain duties. But French cambrics and lawns are prohibited to be imported, except into the port of London, there to be warehoused for exportation. High- er duties are imposed upon the wines of France than upon those of Portugal, or indeed of any other country. . . . before the commencement of the present war3 seventy-five per cent. may be considered as the lowest duty to which the greater part of the goods of the growth, produce, or manufacture of France were liable. But upon the greater part of goods, those duties are equivalent to a prohibition. The French in their turn have, I believe, treated our goods and manufactures just as hardly; though I am not so well acquainted with the particular hardships which they have imposed upon them. Those mutual restraints have put an end to almost all fair commerce between the two nations, and smugglers are now the principal importers, either of British goods into France, or of French goods into Great Britain. . . . First, though it were certain that in the case of a free trade between France and Eng- land, for example, the balance would be in favour of France, it would by no means follow that such a trade would be disadvantageous to England, or that the general balance of its whole trade would thereby be turned more against it. If the wines of France are better and cheaper than those of Portugal, or its linens than those of Germany, it would be more advantageous for Great Britain to purchase both the wine and the foreign linen which it had occasion for of France than of Portugal and Germany. Though the value of the annual importations from France would thereby be greatly augmented, the value of the whole annual importations would be diminished, in proportion as the French goods of the same quality were cheaper than those of the other two countries. This would be the case, even upon the supposition that the whole French goods imported were to be consumed in Great Britain. But, secondly, a great part of them might be re-exported to other countries, where, being sold with profit, they might bring back a return equal in value, perhaps, to the prime

2 A silky, soft textile made typically of linen. 3 The American War of Independence. 3 cost of the whole French goods imported. What has frequently been said of the East India trade might possibly be true of the French; that though the greater part of East India goods were bought with gold and silver, the re-exportation of a part of them to other countries brought back more gold and silver to that which carried on the trade than the prime cost of the whole amounted to. One of the most important branches of the Dutch trade, at present, consists in the carriage of French goods to other European countries. Some part even of the French wine drunk in Great Britain is clandestinely imported from Holland and Zeeland. If there was either a free trade between France and England, or if French goods could be imported upon paying only the same duties as those of other European nations, to be drawn back upon exportation, England might have some share of a trade which is found so advantageous to Holland. . . . There is no commercial country in Europe of which the approaching ruin has not frequently been foretold by the pretended doctors of this system from an unfavourable balance of trade. After all the anxiety, however, which they have excited about this, after all the vain attempts of almost all trading nations to turn that balance in their own favour and against their neighbours, it does not appear that any one nation in Europe has been in any respect impoverished by this cause. Every town and country, on the contrary, in proportion as they have opened their ports to all nations, instead of being ruined by this free trade, as the principles of the commercial system would lead us to expect, have been enriched by it. Though there are in Europe, indeed, a few towns which in some respects deserve the name of free ports, there is no country which does so. Holland, perhaps, approaches the nearest to this character of any though still very remote from it; and Holland, it is acknowledged, not only derives its whole wealth, but a great part of its necessary subsistence, from foreign trade. . . . CHAPTER V OF BOUNTIES . . . That system of laws, therefore, which is connected with the establishment of the bounty,4 seems to deserve no part of the praise which has been bestowed upon it. The improvement and prosperity of Great Britain, which has been so often ascribed to those laws, may very easily be accounted for by other causes. That security which the laws in Great Britain give to every man that he shall enjoy the fruits of his own labour is alone sufficient to make any country flourish, notwithstanding these and twenty other absurd regulations of commerce; and this security was perfected by the revolution5 much about the same time that the bounty was established. The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security is so powerful a principle that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations; though the effect of these obstructions is always more or less either to encroach upon its freedom, or to diminish its se-

4 Monetary encouragement of foreign trade through commercial subsidies. 5 The Glorious Revolution of 1688-89. 4 curity. In Great Britain industry is perfectly secure; and though it is far from being perfectly free, it is as free or freer than in any other part of Europe. . . . CHAPTER VII. OF COLONIES.

Part III.—Of the Advantages which Europe has derived from the Discovery of America, and from that of a Passage to the East Indies by the Cape of Good Hope. , , , . . . The exclusive trade of the colonies, therefore, as it diminishes, or at least keeps down below what they would otherwise rise to, both the enjoyments and the industry of the countries which do not possess it; so it gives an evident advantage to the countries which do possess it over those other countries. This advantage, however, will perhaps be found to be rather what may be called a relative than an absolute advantage; and to give a superiority to the country which enjoys it rather by depressing the industry and produce of other countries than by raising those of that particular country above what they would naturally rise to in the case of a free trade. The tobacco of Maryland and Virginia, for example, by means of the monopoly which England enjoys of it, certainly comes cheaper to England than it can do to France, to whom England commonly sells a considerable part of it. But had France, and all other European countries been, at all times, allowed a free trade to Maryland and Virginia, the tobacco of those colonies might, by this time, have come cheaper than it actually does, not only to all those other countries, but likewise to England. The produce of tobacco, in consequence of a market so much more extensive than any which it has hitherto enjoyed, might, and probably would, by this time, have been so much increased as to reduce the profits of a tobacco plantation to their natural level with those of a corn plantation, which, it is supposed, they are still somewhat above. The price of tobacco might, and probably would, by this time, have fallen somewhat lower than it is at present. An equal quantity of the commodities either of England or of those other countries might have purchased in Maryland and Virginia a greater quantity of tobacco than it can do at present, and consequently have been sold there for so much a better price. So far as that weed, therefore, can, by its cheapness and abundance, increase the enjoyments or augment the industry either of England or of any other country, it would, probably, in the case of a free trade, have produced both these ef- fects in somewhat a greater degree than it can do at present...... The most advantageous employment of any capital to the country to which it belongs is that which maintains there the greatest quantity of productive labour, and increas- es the most the annual produce of the land and labour of that country. But the quantity of productive labour which any capital employed in the foreign trade of consumption can maintain is exactly in proportion . . . to the frequency of its returns. A capital of a thousand pounds, for example, employed in a foreign trade of consumption, of which the returns are made regularly once in the year, can keep in constant employment, in the country to which it belongs, a quantity of productive labour equal to what a thousand pounds can maintain there for a year. If the returns are made twice or thrice in the year, it can keep in constant employment a quantity of productive labour equal to what two or three thousand pounds can maintain there for a year. A foreign trade of consumption carried on with a neighbour- 5 ing, is, upon this account, in general more advantageous than one carried on with a distant country; and for the same reason a direct foreign trade of consumption . . . is in general more advantageous than a round-about one. But the monopoly of the colony trade, so far as it has operated upon the employment of the capital of Great Britain, has in all cases forced some part of it from a foreign trade of consumption carried on with a neighbouring, to one carried on with a more distant country, and in many cases from a direct foreign trade of consumption to a round-about one. . . . It has, in all cases, forced some part of that capital from the trade with Europe, and with the countries which lie round the Mediterranean Sea, to that with the more distant re- gions of America and the West Indies, from which the returns are necessarily less frequent, not only on account of the greater distance, but on account of the peculiar circumstances of those countries. New colonies, it has already been observed, are always understocked. Their capital is always much less than what they could employ with great profit and advantage in the improvement and cultivation of their land. They have a constant demand, therefore, for more capital than they have of their own; and, in order to supply the deficien- cy of their own, they endeavour to borrow as much as they can of the mother country, to whom they are, therefore, always in debt. . . . Their annual returns frequently do not amount to more than a third, and sometimes not to so great a proportion of what they owe. The whole capital, therefore, which their correspondents advance to them is seldom returned to Britain in less than three, and sometimes not in less than four or five years. But a British capital of a thousand pounds, for example, which is returned to Great Britain only once in five years, can keep in constant employment only one-fifth part of the British industry which it could maintain if the whole was returned once in the year; and, instead of the quantity of industry which a thousand pounds could maintain for a year, can keep in constant employment the quantity only which two hundred pounds can maintain for a year. . . . That the returns of the trade to America, and still more those of that to the West Indies are, in general, not only more distant but more irregular, and more uncertain too, than those of the trade to any part of Europe, or even of the countries which lie round the Mediterranean Sea, will readily be allowed, I imagine, by everybody who has any experience of those different branches of trade. . . . Among the enumerated commodities which can be sent to no other market but Great Britain, there are several of which the quantity exceeds very much the consumption of Great Britain, and of which a part, therefore, must be exported to other countries. But this cannot be done without forcing some part of the capital of Great Britain into a round- about foreign trade of consumption. Maryland and Virginia, for example, send annually to Great Britain upwards of ninety-six thousand hogsheads6 of tobacco, and the consumption of Great Britain is said not to exceed fourteen thousand. Upwards of eighty-two thousand hogsheads, therefore, must be exported to other countries, to France, to Holland, and to the countries which lie round the Baltic and Mediterranean Seas. But that part of the capital of Great Britain which brings those eighty-two thousand hogsheads to Great Britain, which re- exports them from thence to those other countries, and which brings back from those other

6 The tobacco hogshead was very large wooden barrel with a roughly 145 U.S. gallon capacity. 6 countries to Great Britain either goods or money in return, is employed in a round-about foreign trade of consumption; and is necessarily forced into this employment in order to dispose of this great surplus. If we would compute in how many years the whole of this capital is likely to come back to Great Britain, we must add to the distance of the American returns that of the returns from those other countries. If, in the direct foreign trade of consumption which we carry on with America, the whole capital employed frequently does not come back in less than three or four years, the whole capital employed in this round-about one is not likely to come back in less than four or five. If the one can keep in constant employment but a third or a fourth part of the domestic industry which could be maintained by a capital returned once in the year, the other can keep in constant employment but a fourth or fifth part of that industry. . . . But had not the colonies been confined to the market of Great Britain for the sale of their tobacco, very little more of it would probably have come to us than what was necessary for the home consumption. The goods which Great Britain purchases at present for her own consumption with the great surplus of tobacco which she exports to other countries, she would in this case probably have purchased with the immediate produce of her own industry, or with some part of her own manufactures. That produce, those manufactures, instead of being almost entirely suited to one great market, as at present, would probably have been fitted to a great number of smaller mar- kets. Instead of one great round-about foreign trade of consumption, Great Britain would probably have carried on a great number of small direct foreign trades of the same kind. On account of the frequency of the returns, a part, and probably but a small part, perhaps not above a third or a fourth of the capital which at present carries on this great round-about trade, might have been sufficient to carry on all those small direct ones, might have kept in constant employment an equal quantity of British industry, and have equally supported the annual produce of the land and labour of Great Britain. All the purposes of this trade being, in this manner, answered by a much smaller capital, there would have been a large spare capital to apply to other purposes: to improve the lands, to increase the manufactures, and to extend the commerce of Great Britain; to come into competition at least with the other British capitals employed in all those different ways, to reduce the rate of profit in them all, and thereby to give to Great Britain, in all of them, a superiority over other countries still greater than what she at present enjoys. . . . CHAPTER VIII. CONCLUSION OF THE MERCANTILE SYSTEM. . . . But in the system of laws which has been established for the management of our American and West Indian colonies, the interest of the home-consumer has been sacrificed to that of the producer with a more extravagant profusion than in all our other commercial regulations. A great empire has been established for the sole purpose of raising up a nation of customers who should be obliged to buy from the shops of our different producers all the goods with which these could supply them. For the sake of that little enhancement of price which this monopoly might afford our producers, the home-consumers have been burdened with the whole expense of maintaining and defending that empire. For this purpose, and for this purpose only, in the two last wars, more than two hundred millions have been spent, and a new debt of more than a hundred and seventy millions has been con- tracted over and above all that had been expended for the same purpose in former wars. 7

The interest of this debt alone is not only greater than the whole extraordinary profit which it ever could be pretended was made by the monopoly of the colony trade, but than the whole value of that trade, or than the whole value of the goods which at an average have been annually exported to the colonies. . . . CHAPTER IX. OF THE AGRICULTURAL SYSTEMS, OR OF THOSE SYSTEMS OF POLITICAL ŒCONOMY WHICH REPRESENT THE PRODUCE OF LAND AS EITHER THE SOLE OR THE PRINCPAL SOURCE OF THE REVENUE AND WEALTH EVERY COUNTRY.

. . . It is thus that every system which endeavours, either by extraordinary encourage- ments to draw towards a particular species of industry a greater share of the capital of the society than what would naturally go to it, or, by extraordinary restraints, force from a particular species of industry some share of the capital which would otherwise be employed in it, is in reality subversive of the great purpose which it means to promote. It retards, instead of accelerating, the progress of the society towards real wealth and greatness; and diminishes, instead of increasing, the real value of the annual produce of its land and labour. All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. The sovereign is completely dis- charged from a duty, in the attempting to perform which he must always be exposed to in- numerable 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. According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understand- ings: first, the duty of protecting the society from violence and invasion of other independ- ent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society. . . .