All right! I'm now partway through the latest steampunk epic Adam Smith's The Wealth of Nations. As stated in my first post, I'm breaking this up into multiple blog posts because it's just so dang big and I can't fit all of it in my head at once. This post covers Book III, "Of the different Progress of Opulence in different Nations", and Book IV, "Of Systems of political Economy". In my edition this is roughly pages 350-650.
One of several things that has surprised me about this book is how much of it is a deep dive into history. He gets into here through his discussion of economics, and draws economic conclusions on the way back out, but has some pretty long passages that are almost purely about the history of Europe or colonialism with almost no direct economics. I'm not complaining! While I'm already familiar with much of this, it's really well-told and interesting stuff.
I was particularly struck by his discussion of the history of Europe after the fall of Rome. As security deteriorated on the continent, the feudal system emerged, with local warlords claiming protection over a geographic region. The larger the region, the more swords at their call and the better chance at resisting invaders, so there was a strong incentive to have a few large duchies versus many smaller ones. This led to the dominance of the law of primogeniture, which passed the entire estate (land and wealth) to the eldest son and nothing to daughters and younger sons.
This helped for security, but led to large landed estates whose owners weren't motivated or necessarily skilled at improving the land. A warrior who inherited a large area full of serfs could easily have all his needs met without particular effort. Smaller farms tend to put much more effort towards improvement than huge inherited estates: if you own a small patch of land, you want to make that patch as productive as you can, and will work hard to dig up stones, drain swamps, clear trees, study crop rotation and otherwise make it yield as much as it can. So as the Middle Ages drew to a close and the security situation improved, there was more of an advantage to countries that divided up estates, either directly among heirs or by transfers to unrelated owners. He continues on pages 362-363:
Entails are the natural consequences of the law of primogeniture. They were introduced to preserve a certain lineal succession [...] to hinder any part of the original estate from being carried out of the proposed line. [...] But in the present state of Europe, when small as well as great estates derive their security from the laws of their country, nothing can be more completely absurd. They are founded upon the most absurd of all suppositions, the supposition that every successive generation of men have not an equal right to the earth, and to all that it possesses; but that the property of the present generation should be restrained and regulated according to the fancy of those who died perhaps five hundred years ago.
I get a kick out of it when Adam Smith describes something as "absurd", it feels like the ultimate diss from him. I also really love him pointing out the injustice of previous generations' wealth determining the fate of future generations; there are surprisingly strong shades of Thomas Piketty in here!
He follows up on this topic later in discussing how inheritance laws impacted the growth and prosperity of new colonies started by European nations. In Pennsylvania, all children inherit equally, so large estates are divided up, and the smaller estates are more rapidly improved. In Spanish and Portuguese colonies, primogeniture rules, so large estates remain intact and are only slowly improved. In France, the eldest child gets a double share of the other siblings, so French colonies perform worse than the English but better than the Iberian ones.
Smith also writes a lot about the town and the country. I've heard the phrase "Town & Country" all my life, and it was fun to think about what that actually means. From page 356:
The great commerce of every civilized society, is that carried on between the inhabitants of the town and those of the country. It consists of the exchange of rude for manufactured produce [...]. The country supplies the town with the means of subsistence, and the materials of manufacture. The town repays this supply by sending back a part of the manufactured produce to the inhabitants of the country. The town, in which there neither is nor can be any reproduction of substances, may very properly be said to gain its whole wealth and subsistence from the country. We must not, however, upon this account, imagine that the gain of the town is the loss of the country. The gains of both are mutual and reciprocal, and the division of labor is in this, as in all other cases, advantageous to all the different persons employed in the various occupations into which it is subdivided. The inhabitants of the country purchase of the town a greater quantity of manufactured goods, with the produce of a much smaller quantity of their own labor, than they must have employed had they attempted to prepare them themselves.
He's describing a symbiotic relationship, where the town buys surplus raw goods from the country and provides useful tools and manufactured goods back. The country is the original source of economic activity, but Smith stresses that the gain of the town does not imply the loss of the country, and their trade is mutually beneficial. While not exactly the same thing, this made me think of Donald Trump's absurd framing that the United States "subsidizes" other countries when we run a trade deficit with them. When we import more from Canada than we export to them, we are getting useful things from them (electricity, auto parts, furs) and giving them IOUs. Likewise, when the town imports from the country, there has to be some exchange, which is some combination of finished good and money.
On page 392 he writes: "It is thus that through the greater part of Europe the commerce and manufacture of cities, instead of being the effect, have been the cause and occasion of the improvement and cultivation of the country." He pretty persuasively argues how Europe evolved from the dark ages and middle ages to the modern era. There used to not be much of anything worth buying or investing in, so nobles and wealthy landlords would just spend their money on maintaining large retinues, directly supporting perhaps 1000 people. I imagine a rural castle keep occupied with court jesters, hunting buddies, extended family and so on.
As manufactures developed, nobles could start to spend money on trinkets and goods from the burghers. The burgers could accumulate some wealth, and eventually get long-term leases from the nobles. Burghers would then spend their money to improve the land: because they have long-term leases with rights to keep the profits from production, they stand to benefit from the improved productivity of the land, which serfs did not. Smith notes that nobles were just chasing after shiny baubles, and burghers were just looking to turn a penny; neither of them explicitly thought about the good of the country as a whole, but their activities eventually led to great improvement in agricultural efficiency and the overall wealth of the nation. Overall, this is an interesting but pretty persuasive inversion from the naive thought that the country reached a certain level of development and then the surplus flowed into urban development; instead, the generation of urban goods led to the breakup of large unproductive estates and the improving development of the country.
Earlier, on pages 388-389, he uses more colorful language to describe this development:
But what all the violence of the feudal institutions could never have effected, the silent and insensible operation of foreign commerce and manufacturers gradually brought about. These gradually furnished the great proprietors with something for which they could exchange the whole surplus production of their lands, and which they could consume themselves without sharing it either with tenants or retainers. All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other persons. For a pair of diamond buckles perhaps, or for something as frivolous and useless, they exchanged the maintenance, or what is the same thing, the price of the maintenance of a thousand men for a year, and with it the whole weight and authority of what it could give them. The buckles, however, were to be all their own, and no other human creature was to have any share of them; whereas in the more ancient method of expence they must have shared with at least a thousand people. With the judges that were to determine the preference, this difference was perfectly decisive; and thus, for the gratification of the most childish, the meanest and the most sordid of all vanities, they gradually bartered their whole power and authority.
I really love that writing. "All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind." I love this based, red-rose-emoji flavor of Smith. This passage also puts me in mind of the story from the Old Testament of Esau bartering his birthright to Jacob for a bowl of stew. Greedy and short-term-oriented people will usually lose out to frugal and patient people.
Smith seems to really admire David Hume and quotes him fairly frequently in this book. I think of Smith as being the first "real" economic writer, but based on these quotes it does sound like Hume also write a lot about commerce and related topics. I remember really enjoying Hume's writings when I read him way back in my freshman philosophy class, and it would be fun to pick him up again.
Starting in book IV, Smith argues strenuously against laws that encourage particular industries, such as prohibiting imports, heavily taxing imports, banning exports, and so on. He uses a simple analogy: in any household, you shouldn't pay more to create a thing yourself than you would pay for someone else to make it for you. It's silly for the tailor to make his own shoes when he can pay the cobbler to make them; it's silly for the cobbler to make his clothes when he can pay the tailor to make them; it's silly for the farmer to make either one, he should focus on growing crops and then buy his clothes and shoes.
Likewise, for nations, it's silly to pay more to produce domestically what you could more cheaply import. He grants that protectionism can be successful in establishing domestic industries, but argues that in the long run this isn't helpful. The nation has lost money in all the intervening years compared to what it would have spent from buying cheaper imports, and hence there is less capital available to invest in those domestic manufactures, which limits their strength and competitiveness in the market. He thinks that over the long run, either domestic industries will naturally spring up (taking advantage of the lower freight costs, the preference of domestic investors to invest close to home, and so on), or else you're better off focusing on your nation's natural strengths (earning more money at the thing you're good at making and cheaply buying the things you're bad at making). I think even today this is still mainstream economic orthodoxy. Paul Krugman has been writing many similar posts in the wake of "Liberation Day" and other extreme tariffs.
The main counter-example is when an industry should be domestically based for national security reasons, like steel, or because it is so essential to the rest of the economy that it could be a natural pressure point for rivals, like petroleum or rare earth metals. Smith gets to this, too! His own example, interestingly, focuses on the merchant marine - uniquely for England, because its defense depends on a strong navy, and they were rivals with the Dutch who also had a strong navy, so they forbade Dutch traffic to English ports, thus encouraging the development of English sailing skills.
Besides national security, there are two other cases where Smith supports taxing or blocking imports. One is when a domestic industry is subject to a tax. In this case, the tax on foreign imports should balance out the domestic tax, so domestic producers are not unfairly penalized. This basically just prevents a distortion of the market. Finally, import restrictions can be a useful tactic to retaliate against another nation's own import taxes. He cites several historical examples, like France forbidding importation of English hardwares, which was followed by England taxing French wines. There were similar disputes with the Dutch of tit-for-tat retaliatory tariffs. Interestingly, many of these cases escalated to full-on shooting wars as a result of the trade dispute, and the peace terms generally rescinded both the original offending tax or ban and the retaliatory one. Once again, Europa Universalis IV has proven to be very accurate to history, in this case with its Trade Dispute Casus Belli!
Book IV includes a very long digression on the corn trade, which I actually ended up really loving. (Quick term check: I didn't learn this until embarrassingly late in life, but the word "corn" has historically meant a cereal/grain crop grown primarily for human consumption, like wheat or oats.) Smith rails against this law banning corn merchants, who were basically wholesalers who bought from many farmers and sell to many consumers. The sentiment behind this law makes sense: we want food to be cheap, so we should cut out the middlemen and have the growers sell directly to the consumers.
But as he shows, this law had the opposite effect: it did not lower the price of food, and hurt overall food security. The jobs a corn merchant would have to perform (storing the grain, transporting it, meeting with buyers, etc.) still had to be done, but were done by the farmers instead, so their prices had to go up to account for the non-farming work they did. And the merchants performed a very useful role. It's in the interest of the corn merchant to sell corn for the maximum price he can get, but no more. If he sells for less, then he'll sell all of his stock from this year's harvest and leave potential profit on the table; worse, people will consume all of the grain before the next year's harvest, leading to widespread famine. Smith makes a great analogy to the captain of a ship on a long ocean voyage. If it looks like the ship is in danger of running out of food, the captain will put the crew on limited rations. The crew will hate this and will blame the captain for being cruel; but it's for the good of the crew, and by imposing the "dearth" of hunger, he prevents the "famine" of starvation.
As the book goes on, Smith spends more and more time recounting history. He describes ancient Greek and Roman governments, their distinct systems of colonies, the collapse of empire, the rise of the feudal system, the riches Venice acquired by having a monopoly of trade from the Mamluks (who were their mutual enemy with the Turks) in selling goods from the East to Europe, how Portugal and Spain tried to find their own direct trade routes to the East, the conquest of the native Americans, the establishment of various colonies, and so on. Once again I'm amazed at how accurately and with how much detail Europa Universalis captured the history, economics and power systems of these centuries.
Smith also performs a good analysis of trade-offs in policy, looking at the plusses and minuses and judging the overall net impact. One particularly compelling case studio is the monopoly on trade Britain had with its colonies, with England the sole allowed importer and exporter to the North American states. On the surface this seems like an advantage to Britain, as it got all of the profit available from this trade both coming and going. But Smith looks at the alternative and argues that it was ultimately disadvantageous to both parties.
First, the monopoly stunted the development of the American colonies. Its produce was sold more cheaply and its imports were more expensive than would have been the case if it could freely trade with all countries (perhaps charging more for tobacco sold to the French or more cheaply buying plows from the Dutch). So the total value of trade with America is lower than it would otherwise have been: if America had been more profitable, it could have invested more profits back into its land and grown its economy more and had more to sell and been able to afford buying more. Most trade would still naturally have gone to England, and it's likely that England's share of a larger pie would have more value than the totality of a smaller pie.
But Smith also makes a more complex and nuanced argument. By making trade with the Americas so lucrative, English merchants poured most of their own capital into trade with the Americas, and so did not compete with other markets such as the Mediterranean trade. Because England had such a great navy, it was capable of being a major player in intra-European trade. But because it withdrew from that market, its rivals were able to capture higher profits. And so goods that were not originally sourced from the Americas ended up being more expensive to import to England because they were carried by foreign vessels; and British goods that were not destined for the Americas sold for less than they would otherwise. There's an opportunity cost here: giving up the monopoly on American trade would not just have meant a loss in in that one particular area, it would also have meant a corresponding gain in other areas as British resources and activity were reallocated into more profitable pursuits. Smith firmly believes that the result would have been a net gain for Britain.
Smith gets very detailed and particular in a lot of his analyses like this one: not just drawing an abstract model, but talking in detail through a use-case. That can make the book seem more dated, and in fact, this was arguably dated when it came out: the first edition couches all its discussions of American trade with phrases like "before the late disturbances," as Smith evidently believed the revolutionary sentiment would have eroded by the time his readers had the book. But I think that specificity is a strength, as he can make empirical arguments through presenting evidence of real-world activities, not just inductive reasoning based on theories.
Smith's general and repeated opinion tends to be that government policy distorts the economy, and almost always harms it. In trying to encourage a particular activity or industry, they generally hurt other parties (like the consumers or suppliers of that industry), and often don't even particularly help their intended target (due to rising costs, flat demand, currency devaluation or other issues). There are some particular cases where it may still make sense for the government to interfere in the economy, as with naval supplies for Britain's national security, but his default position is that a hands-off policy leads to the best outcomes.
It isn't that he dislikes government, he just sees it as occupying a largely different sphere from commerce. Jumping ahead a bit, at the very end of Book IV (page 651), he writes:
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 discharged 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 of 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 understandings: first, the duty of protecting the society from the violence and invasion of other independent 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 expence to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.
So much interesting stuff there! First, there's the well-known laissez-faire mindset, that a politician or bureaucrat in the capital doesn't know your situation as well as you do, so the government/sovereign should avoid interfering: even if they're trying to help, they may cause harm. Then there's a positive enumeration of the things government should be involved in. The first two, national security and internal justice, are self-evident. The third is very interesting: "erecting and maintaining certain public works and certain public institutions" that will broadly benefit society but are not profitable. I'm really curious if he'll go into this in more detail in Book V. In Smith's day I can see this including things like public highways and ports, but maybe also universities and hospitals. In modern times you could include, well, almost anything in there: some that come to my mind are childhood nutrition, childcare, universal education, universal healthcare, high-speed rail, etc. And that closing reference to "great society" makes me very curious if there was a conscious link between LBJ's ambitious anti-poverty programs and The Wealth of Nations. (Probably not! But kind of fun to think about!)
Earlier in Book IV, he also calls out a really interesting case with slavery. While he generally favors the liberal laws of England over the absolutist laws of France, Spain and Portugal, he notes on pages 553-554:
The profit and success of that which is carried on by slaves, must depend equally upon the good management of those slaves; and in the good management of their slaves the French planters, I think it is generally allowed, are superior to the English. The law, so far as it gives some weak protection to the slave against the violence of his master, is likely to be better executed in a colony where the government is in a great measure arbitrary, than in one where it is altogether free. In every country where the unfortunate law of slavery is established, the magistrate, when he protects the slave, intermeddles in some measure in the management of the private property of the master; and, in a free country, where the master is perhaps either a member of the colony assembly, or an elector of such a member, he dare not do this but with the greatest caution and circumspection. The respect which he is obliged to pay to the master, renders it more difficult for him to protect the slave. But in a country where the government is in a great measure arbitrary, where it is usual for the magistrate to intermeddle even in the management of the private property of individuals, and to send them, perhaps, a lettre de cachet if they do not manage it according to his liking, it is much easier for him to give some protection to the slave; and common humanity naturally disposes him to do so.
I'll write more about this below, but I really love Smith's moral voice here and throughout the book. He's describing the world as it is, where it's legal for one human to own another human, but also makes clear that this is outrageous and immoral. Anyways, reading this passage put me in mind of George Washington's Newport Address - as I've written about previously, that's possibly my favorite bit of writing from the Founding Fathers. In it, Washington promulgates a vision where a strong federal government can protect minority rights against the tyranny of the majority. I think Smith is describing something similar here: a strong government can better protect individual rights than a weak government which must follow the will of the wealthy.
That said, I do wonder about this specific example Smith gives about the colonies. I tend to think of Haiti when I imagine French slave colonies, and I don't think of the Haitain slaves as being treated well. I wonder if treatment was better in other French colonies besides Haiti, or if the English were worse than Haiti but managed to emancipate their slaves before a rebellion. Or maybe the Haitians were better treated, and that treatment better positioned them for a successful rebellion than more ground-down slaves could have pulled off.
Continuing that moral vein: I was pleased to see some great passages where Smith acknowledges the horrific ways the Europeans treated native Americans and African slaves. There seems to be a modern belief that anti-imperial sentiment is a "woke" concern that started in the 21st century, but Smith was writing in the 1700s and very righteously and sternly denouncing European exploitation of the Americas. Of course, people in the past also had morals and sentiments, and could recognize cruelty and injustice. It may have been even easier for them to see it, as they lived closer in time to its occurrence and lived even more directly in its shadow. From page 416:
The commodities of Europe were almost all new to America, and many of those of America were new to Europe. A new set of exchanges, therefore, began to take place which had never been thought of before, and which should naturally have proven as advantageous to the new, as it certainly did to the old continent. The savage injustice of the Europeans rendered an event, which ought to have been beneficial to all, ruinous and destructive to several of those unfortunate countries.
I like how "savage" is applied to Europeans here, opposite its more customary usage to describe the natives. But "savage" is indeed how the Europeans treated the Americans. On page 528:
In consequence of the representations of Columbus, the council of Castile determined to take possession of countries of which the inhabitants were plainly incapable of defending themselves. The pious purpose of converting them to Christianity sanctified the injustice of the project.
And on page 555:
Folly and injustice seem to have been the principles which presided over and directed the first project of establishing those colonies; the folly of hunting after gold and silver mines, and the injustice of coveting the possession of a country whose harmless natives, far from having ever injured the people of Europe, had received the first adventurers with every mark of kindness and hospitality.
Smith is really interested in the colonization of the Americas generally and of English North American in particular, and it's pretty amazing to see Smith frankly admitting that within 50 to 100 years the American colonies could be larger and more prosperous than the homeland of England. This turns into a very long historical and political passage that doesn't have a whole lot to do with economics, he just segues in from an economic discussion, but it's really fascinating. He even gets into armchair psychology, musing over how to convince the rebellious American leaders back into the loyalist British fold. From pages 587-588:
Instead of piddling for the little prizes which are to be found in what may be called the paltry raffle of colony faction; they might then hope, from the presumption which men of the great prizes which men naturally have in their own ability and good fortune, to draw some of the great prizes which sometimes come from the wheel of the great state lottery of British politics. Unless this or some other method is fallen upon, and there seems to be none more obvious than this, of preserving the importance and of gratifying the ambition of the leading men of America, it is not very probable that they will ever voluntarily submit to us; and we ought to consider that the blood which must be shed in forcing them to do so is, every drop of it, the blood either of those who are, or of those whom we wish to have for our fellow-citizens. They are very weak who flatter themselves that, in the state to which things have come, our colonies will be easily conquered by force alone. The persons who now govern the resolutions of what they call their continental congress, feel in themselves at this moment a degree of importance which, perhaps the greatest subjects in Europe scarce feel. From shopkeepers, tradesmen, and attornies, they are become statesmen and legislators, and are employed in contriving a new form of government for an extensive empire, which they flatter themselves, will become, and which, indeed, seems very likely to become, one of the greatest and most formidable that ever was in the world.
This and the surrounding passages lines up very well with my understanding from The Men who Lost America. As both books point out, Americans paid almost no tax to Britain but benefited enormously from British spending, particularly its large and expensive army and navy that defending the country against French, Spanish and native American attacks, as well as repelled pirates and kept sea lanes safe for shipping. It wasn't politically tenable to ask British taxpayers to continue footing the bill to support America, especially since American colonists had the added benefits of better wages and cheaper land.
Smith takes seriously this question of how to resolve the intensifying animosity over taxation. He doesn't think that American assemblies would willingly impose British taxes, as doing so would destroy their local credibility. And Britain can't directly collect taxes themselves as an outside non-local force. Again, as both the above passage and The Men Who Lost America comment, Britain saw Americans as British subjects, and hated the idea of killing their own civilians.
Smith ultimately lands on absorbing America into Britain, giving the colonies proportional representation in Parliament. The biggest selling point here is the American ego: people had been raised from shopkeepers and lawyers to American statesmen, so they wouldn't willingly go back down to shopkeepers, but might willingly rise up to Member of Parliament. He thinks that eventually the seat of Parliament is likely to move to the Americas once their (our) nation grows large and rich enough. Which is kind of what happened in Charles Stross's Merchant Princes series!
The last part of Book IV describes and critiques various economic systems: a commercial-oriented one, a mercantile-oriented one, and finally what a hypothetical agricultural-oriented one would look like. The last case is interesting: he's writing in the voice of a proponent of the system while describing and explaining it, which goes on for a good run of many pages. You could very easily quote something out of context to make it sound like Smith believes the opposite of what he actually believes; even for a whole page, he isn't couching in terms like "Some believe" or "They say". I do like how he writes this, just staying in this particular voice and register while he patiently builds up the system he's about to tear down, but it's an example of why books like this require a lot of focus while reading. If you were to just drop into that section you'd get the completely opposite impression of what he's trying to say.
As with the first two books, I jotted down notes about passages that particularly struck me - even more than the first two books! I don't think that's necessarily because these ones were more interesting, more that I was in the habit of doing it. I tried to fold some of them into the main part of the post, but here's the cavalcade of Thoughts!
From pages 398-399:
A rich country, in the same manner as a rich man, is supposed to be a country abounding in money; and to heap up gold and silver in any country is supposed to be the readiest way to enrich it. For some time after the discovery of America, the first enquiry of the Spaniards, when they arrived upon any unknown coast, used to be, if there as any gold or silver to be found in the neighborhood By the information which they received, they judged whether it was worth while to make a settlement there, or if the country was worth the conquering. Plano Carpino, a monk sent ambassador from the kind of France to one of the sons of the famous Gengis Khan, says that the Tartars used frequently to ask him, if there was plenty of sheep and oxen in the kingdom of France? Their enquiry had the same object with that of the Spaniards. They wanted to know if the country was rich enough to be worth the conquering. Among the Tartars, as among all other nations of shepherds, who are generally ignorant of the use of money, cattle are the instruments of commerce and the measures of values. Wealth, according to them, consisted in cattle, as according to the Spaniards, it consisted in gold and silver. Of the two, the Tartar notion, perhaps, was the nearest to the truth.
That's a fun paragraph. Throughout all of The Wealth of Nations Smith keeps pooh-poohing the obsession Europeans have with gold and silver. As he points out here, while obsession with gold is considered "civilized" and obsession with cattle is considered "primitive", cattle actually benefit a nation while gold, by itself, does not.
On page 407:
Money is the known and established instrument of commerce, for which every thing is readily given in exchange, but which is not always with equal readiness to be got in exchange for every thing. [...] His profit arises more directly from selling than from buying, and he is upon all these accounts generally much more anxious to exchange his goods for money, than his money for goods. But though a particular merchant, with abundance of goods in his warehouse, may sometimes be ruined by not being able to sell them in time, a nation or country is not liable to the same accident. [...] And though goods do not always draw money so readily as money draws goods, in the long-run they draw it more necessarily than even it draws them. Goods can serve many other purposes besides purchasing money, but money can serve no other purpose besides purchasing goods. Money, therefore, necessarily runs after goods, but goods do not always or necessarily run after money. The man who buys, does not always mean to sell again, but frequently to use or to consume; whereas he who sells, always means to buy again. [...] It is not for its own sake than men desire money, but for the sake of what they can purchase with it.
I found this passage interesting for a couple of reasons. First, while for most of the book Smith treats money as absolutely equivalent with the thing you can buy or sell for that money, here he observes that it is not perfectly fluid. Basically, if I have $1000 I can very easily buy a computer; but if I have a computer it can be very hard to sell it for $1000. But, by the end of the passage, he notes that a computer (e.g.) has intrinsic value, while $1000 has no intrinsic value. So in the long run it's much more important for you to be making and selling useful things, than to hoard money. His example here is a micro-economic merchant, but the point he's making is macro-economic national policy.
Page 408:
But it readily occurs that the number of such utensils is in every country necessarily limited by the use which there is for them; that it would be absurd to have more pots and pans than were necessary for cooking the victuals usually consumed there. [...] To attempt to increase the wealth of any country, either by introducing or by detaining in it an unnecessary quantity of gold and silver, is as absurd as it would be to attempt to increase the good cheer of private families, by obliging them to keep an unnecessary number of kitchen utensils. As the expense of purchasing these unnecessary utensils would diminish instead of increasing either the quantity or the goodness of the family provisions; so the expense of purchasing an unnecessary quantity of gold and silver must, in every country, as necessarily diminish the wealth which feeds, clothes, and lodges, which maintains and employs the people.
I should say here that I think I'm quoting literally every time Smith uses an analogy in the book, so they aren't actually as common as you might think from reading this blog post. Some of his analogies are better than other. I mostly love his voice here: yes, it would be ridiculous for the government to force everyone to have more pots and pans in the mistaken belief that having more utensils than they need would make people happier. Likewise, it's dumb to force more gold into a country than it needs to carry on its business. Doing that just makes gold less valuable and prices more expensive.
Page 435:
To judge whether such retaliations are likely to produce such an effect, does not, perhaps, belong so much to the science of a legislature, whose deliberations ought to be governed by general principles which are always the same, as to the skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs.
I love that shade. I'm still not totally sure what he means here, but I think he's saying that politicians should not interfere with markets, and if they do try to interfere, it's a sign that they're trying to curry favor with special interests and not serving the greater good of the nation.
Page 463:
And France is a much richer country than North America; though, on account of the more unequal distribution of riches, there is much more poverty and beggary in the one country, than in the other.
I perked up at this mention of income inequality. There are a handful of times he references inequality in this book, and it's usually more of an aside, not a major focus like in Piketty. But I think worth observing the assumption that inequality is bad.
Pages 475-476:
So very heavy a tax upon the first necessary of life, must either reduce the subsistence of the labouring poor, or it must occasion some augmentation of their pecuniary wages, proportionable to that in the pecuniary price of their subsistence. So far as it operates in the one way, it must reduce the ability of the labouring poor to educate and bring up their children, and must, so far, tend to restrain the population of the country. So far as it operates in the other, it must reduce the ability of the employers of the poor, to employ so great a number as they otherwise might do, and must, so far, tend to restrain the industry of the country.
Similarly here, his sympathy seems to be aligned with the poor working folks at the bottom of the economy, not the wealthy merchants at the top. Again, different from my pre-existing image of Adam Smith as either promoting the interests of the wealthy or of prioritizing the national wealth over the wealth of individuals. Here he's arguing against the taxation (direct or indirect) on food, which is a basic necessity of life.
Page 478-480:
When you dam up a stream of water, as soon as the dam is full, as much water must run over the dam-head as if there was no dam at all. The prohibition of exportation cannot detain a greater quantity of gold and silver in Spain and Portugal than what they can afford to employ, than what the annual produce of their land and labour will allow them to employ [...] When they have got this quantity the dam is full, and the whole stream which flows in afterwards must run over. The annual exportation of gold and silver from Spain and Portugal accordingly is, by all accounts, notwithstanding these restraints, very near equal to the whole annual importation. As the water, however, must always be deeper behind the dam-head than before it, so the quantity of gold and silver which these restraints detain in Spain and Portugal must, in proportion to the annual produce of their land and labour, be greater than what is to be found in other countries. The higher and stronger the dam-head, the greater must be the difference in the depth of the water behind and before it. [...] The cheapness of gold and silver, or what is the same thing, the dearness of all commodities, which is the necessary effect of this redundancy of the precious metals, discourages both the agriculture and manufactures of Spain and Portugal, and enables foreign nations to supply them with many sorts of rude, and with almost all sorts of manufactured produce, for a smaller quantity of gold and silver than what they themselves can either raise or make them for at home. [...] Open the flood-gates, and there will presently be less water above, and more below, the dam-head, and it will soon come to a level in both places. [...] The loss which Spain and Portugal could sustain by this exportation of their gold and silver would be altogether nominal and imaginary. The nominal value of their goods, and of the annual produce of their land and labour, would fall, and would be expressed or represented by a smaller quantity of silver than before: but their real value would be the same as before, and would be sufficient to maintain, command, and employ, the same quantity of labour. [...] Those goods would, probably, the greater part of them, and certainly some part of them, consist in materials, tools, and provisions, for the employment and maintenance of industrious people, who would reproduce, with a profit, the full value of their consumption. A part of the dead stock of the society would thus be turned into active stock, and would put into motion a greater quantity of industry than had been employed before. The annual produce of their land and labour would immediately be augmented a little, and in a few years would, probably, be augmented a great deal; their industry being thus relieved from one of the most oppressive burdens which it at present labours under.
Phew - apologies for the long quote! Again, I perk up any time Smith tries to make an analogy, so I had to pull that one in here. This kind of continues the water-based metaphor for money that he deployed in the earlier books, but here, instead of a stream that carries things along, he's focusing on the depth of the water; and here more water is bad. The Iberian leaders naively think that having gold and silver will make them rich, so they import as much as they can and try to block its exports; but it can't fully stop the exports, it's so easy and profitable that most precious metals leave anyways. But the fact that more gold and silver remain in Spain makes everything more miserable: their currency is worth less than other nations' currency, so it's more expensive for them to import useful machines and supplies for manufacturing. He's pointing out that, if everything cost half as much, then on paper it would seem like a loss but in reality it would be a wash, and in the long run would be better for them.
Page 497:
Jack of all trades will never be rich, says the proverb. But the law ought always to trust people with the care of their own interest, as in their local situation they must generally be able to judge better of it than the legislator can do.
There are a couple of phrases like this that are close to but not quite what I'm used to. I think of "master of none" as being a general comment on expertise, while "never be rich" seems like a more practical assessment that a specialist can command a higher wage than a generalist. The second part of this quote is a good restatement of Smith's general belief, that the people engaged in some enterprise understand it better than the national government will, so they should generally be left alone as even attempts to "help" them may prove counterproductive.
Page 507:
The laws concerning corn may every where be compared to the laws concerning religion. The people feel themselves so much interested in what relates either to their subsistence in this life, or to their happiness in a life to come, that government must yield to their prejudices, and in order to preserve the public tranquility, establish that system which they approve of. It is upon this account, perhaps, that we so seldom find a reasonable system established with regard to either of those two capital objects.
That's a really interesting comparison. The kind of arch tone here is another thing that reminds me of David Hume's skeptical writing on religion. I am a little curious what Smith's own religious beliefs were; from some very light online research, it sounds like it isn't generally clear, and various writings of his make him sound more like an atheist, a deist or a religious man.
But anyways, yes, I think Smith's point here is solid. To me this falls in the category of "grandstanding". If you can say that you're protecting American farmers and/or making food healthier and more affordable, you'll probably get a lot of easy support for your law, but you might end up with ridiculous situations like subsidizing high fructose corn syrup through the USDA while recommending diets without added sugars through the FDA. And pandering to local religious prejudice can be a big vote-winner, but the resulting laws tend to be dire.
On page 532, while discussing America:
Every colonist gets more land than he can possibly cultivate. He has no rent, and scarce any taxes to pay. [...] He has every motive to render as great as possible a produce, which is thus to be almost entirely his own. But his land is commonly so extensive, that with all his own industry, and with all the industry of other people whom he can get to employ, he can seldom make it produce the tenth part of what it is capable of producing. He is eager, therefore, to collect labourers from all quarters, and to reward them with the most liberal wages. But those liberal wages, joined to the plenty and cheapness of land, soon make those labourers leave him, in order to become landlords themselves, and to reward, with equal liberality, other labourers, who soon leave them for the same reason that they left their first master. [...] In other countries, rent and profit eat up wages, and the two superior orders of people oppress the inferior one. But in new colonies, the interest of the two superior orders obliges them to treat the inferior one with more generosity and humanity; at least, where that inferior one is not in a state of slavery.
My first thought on reading that is that this dynamic sounds a lot like Silicon Valley and startup culture. For decades, there has been a pattern where a company starts, it makes a lot of money, then the workers leave and start their own competing companies, who often go on to make even more money. I think you could generalize Smith's colonial farmers and Silicon Valley founders: when an economy is rapidly growing, there is much more demand for labor, which is better compensated and better treated; and the opportunities from that rapidly growing economy also creates conditions whereby workers can become owners themselves.
Which, of course, once again restates Thomas Piketty. When there is a high rate of growth, inequality tends to decrease. While Adam Smith was writing, America had a high rate of growth, England a lower rate of growth, and France lower still, which pretty directly and clearly predicts the differences in inequality between those nations.
Finally, this potential for the best of all worlds (rising individual fortunes, rising national wealth, and lowering inequality) is only realized in systems of liberty where workers have the freedom to come and go as they please. Silicon Valley happened in Silicon Valley because, unlike most of the country, California bans non-compete agreements between employers and employees. And New England became an economic powerhouse where the Caribbean islands did not because most English colonists were freemen while nearly all Caribbean workers were slaves.
Page 537:
The government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatsoever.
I love how blunt and direct that is. Smith prefers a separation between government and commerce, but when there is an alignment, one where the businessmen are in charge is the absolute worst. He was writing about the various East India companies, but I think it's also applicable to today's oligarchies, petrostates and banana republics.
Page 576:
But above all, that irregular and partial administration of justice, which often protects the rich and powerful debtor from the pursuit of his injured creditor, and which makes the industrious part of the nation afraid to prepare goods for the consumption of those haughty and great men, to whom they dare not refuse to sell upon credit, and from whom they are altogether uncertain of payment.
Again, we see Smith's sentiments in favor of the little guy (here, the petite-bourgeois tradesman) over the "rich and powerful" (most likely a landed nobleman). This briefly touches on one of Katharina Pistor's big ideas in The Code of Capital, that any system needs to explicitly prioritize the rights of stakeholders. Over centuries, at some times the common law has protected the rights of debtors over those of creditors, and at other times it protects the rights of creditors over those of debtors.
Page 602-603
But a company of merchants are, it seems, incapable of considering themselves as sovereigns, even after they have become such. Trade, or buying in order to sell again, they still regard as their principal business, and by a strange absurdity, regard the character of the sovereign as but an appendix to that of the merchant, as something which ought to be made subservient to it. [...] It is the interest of the East India company considered as sovereigns, that the European goods which are carried to their Indian dominions, should be sold there as cheap as possible; and that the Indian goods which are brought from thence should bring there as good a price, or should be sold there as dear as possible. But the reverse of this is their interest as merchants. As sovereigns, their interest is exactly the same with that of the country which they govern. As merchants, their interest is directly opposite to that interest.
Yet again, Smith sees commercial and government interests as diametrically opposed, and he doesn't necessarily see the commercial interests as superior to governmental ones. While reading this, I was musing on how the idea of public-private partnerships has really taken off in recent decades, and in the US is often seen as a centrist "third way" that combines liberal and conservative values. I get the feeling that Adam Smith would recoil in horror at public-private partnerships. The parties' interests are opposite.
Page 609:
They endeavor to buy the work of the poor spinners as cheap as possible. They are as intent to keep down the wages of their own weavers, as the earnings of the poor spinners, and it is by no means for the benefit of the workman, that they endeavor either to raise the price of the complete work, or to lower that of the rude materials. It is the industry which is carried on for the benefit of the rich and the powerful, that is principally encouraged by our mercantile system. That which is carried on for the benefit of the poor and the indigent, is too often, either neglected, or oppressed.
Adam Smith channeling Karl Marx! The owners of capital will always seek to maximize their profits, which necessarily comes at the expense of the workers.
Page 625:
Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it.
This actually contradicts my thought from my first post, that historically we focused more on producers when considering economics and politics, and that our consumer-oriented mindset is a more modern 1970s-and-on invention. I guess that's not true! Smith's statement does make a ton of sense though. There's no purpose in producing something that nobody wants to consume. Similar to money running after goods, production runs after consumption.
Page 626:
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 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 expence of maintaining and defending that empire. For this purpose, and for this purpose only, in the last two wars, more than two hundreds millions have been spent, and a new debt of more than a hundred and seventy millions has been contracted over and above all that has been expended for the same purpose in former wars. 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.
Again, I love this DSA-flavored Smith. It's a pretty striking anti-imperialist statement from back when the British Empire was just getting off the ground. It's a strong denouncement of how government policy and martial force are used to prop up special economic interests, which is not only immoral but ruinously wasteful; there are endless examples from our own nation's history we could add to Smith's here.
Page 642:
In representing the wealth of nations as consisting, not in the unconsumable riches of money, but in the consumable goods annually reproduced by the labour of the society; and in representing perfect liberty as the only effectual expedient for rendering this annual reproduction the greatest possible, its doctrine seems to be in every respect as just as it is generous and liberal.
This particular passage is describing the French Å“conomical philosophy, but highlighting the elements that most align with Smith's own view, and I think is a good 10,000 foot view at the book's thesis. What is the Wealth of Nations? It isn't the number of gold and silver coins in your vault. It's how much your nation can produce: growing crops, building things, providing services. How do you increase your nation's wealth? By making your people free to pursue their own best interests.
Phew! Okay, that's it for this entry! I have one last book coming up in The Wealth of Nations at about 300 pages, so I will likely see you back here again in a couple of weeks!
