All right! It's been a long journey, but we've finally come to the end of The Wealth of Nations. This post covers the fifth and final book, "Of the Revenue of the Sovereign or Commonwealth". In my edition this was relatively brief, taking us from page 650 to 900. I'll share my understanding of this final section, some (many) quotes that particularly struck me, and close with some vague and underdeveloped impressions of the book as a whole.
Near the end of Book IV Smith cleanly delineated the separate responsibilities of the private sphere of business with the public sphere of government. Book V looks directly at the operations of government and, linking back to economic concerns, how those operations have been and should be funded. I was struck that the overall shape of the book reminded me in many ways of books written in the last few decades from diverse authors like Thomas Piketty, Mark Higgins, William Bernstein and John Bogle. Like these authors, Smith spends most of the book examining historical events, drawing empirical data from them, and presenting compelling theories that explain the data. And then, in the last part of the book, offering their opinions on how to best address contemporary problems, applying the lessons learned to the major issues facing us today. By this point in the book we've built up a lot of trust in the author, understand their thought process, and can more easily be persuaded by their recommendations. The difference, of course, is that Smith was writing 250 years ago and speaking to specific situations that no longer exist; but, as I'll describe below, that ends up being a pretty freeing and helpful situation to analyze.
As a refresher, Smith had identified three important roles for government: defending the nation against external threats, providing internal security and justice, and supporting certain public works. The most elemental duty is national defense. As with his earlier writing in reviewing the historical evolution of merchant burghers in the feudal system, he provides a historical overview of how a nation's relationship with national defense will change over time.
In societies primarily composed of hunters, such as the natives of North America or Africa, the economic skills of the society are the same as the skills of the warriors. The vast majority of men are used to roaming, to following their leader, to fighting and taking down their target. So no particular expense is needed to support this nation/tribe in war: everyone is already trained and equipped. Likewise, in societies primarily oriented around herding, like the Tartars or Arabs, societies are migratory and oriented towards following their leader. Herders are used to violence in defending their flock against threats like wolves, and herders also have ample time to practice skills like archery and swordfighting even while at peace, without neglecting their flocks. So here too, no particular expense is needed in attacking or defending another tribe/nation; and a successful skirmish or war can enrich the tribe by seizing cattle, tools, or more grazing land.
As civilization evolves and basic farming begins, a new dynamic begins to emerge. Societies are less migratory and more rooted to specific areas. Primitive farmers do still have a lot of leisure time: they work hard while sowing, and again while harvesting, but the rest of the time they are fairly free. So, in a feudal-type system, it's fairly common for a lord to summon their farmers to fight during the summer. As long as they make it back in time for harvest, they haven't really lost out on any economic activity. And farmers grow their own food supply, so the lord may not even require much additional expense to feed their army.
But if someone is a crafter, tradesman or merchant, every day they spend in the army is a day of lost income for them. They don't have crops growing underground regardless of their actions, they only gain their wages or profit by active and constant effort. Whereas a more primitive society might have 1/4 or 1/5 of the population available to serve as warriors, a more modern society may only have 1/100. Now, when the country goes to war, the sovereign must take on the expense of maintaining the army. One approach is to compensate those who are drafted into service, to replace their lost wages. A better approach is to hire and pay professional soldiers who fully focus on the art of war.
Smith is a big fan of professional armies. He essentially argues that a professional army will always defeat a militia, thanks to their better training and discipline. But he also notes that when a militia fights together for a certain amount of time, they essentially evolve into a professional army; conversely, if a professional army grows complacent (as in the declining years of the Roman Empire), they essentially devolve into a militia. He also notes that, while primitive societies may have better discipline thanks to their familiarity with following a known and respected leader, modern technology provides the societies of tradesmen an insurmountable advantage over their less advanced foes. Modern nations with specialized workers can produce firearms, cannons, defensive fortifications and other weapons of war that even the bravest people equipped with bows and spears cannot overcome.
The second major duty of the government is to provide systems of justice. Here too he takes a historical and empirical look, seeing how different nations have funded their justice systems and how those have functioned. In early European kingdoms, the petitioner would give a gift to the king or whoever was responsible for dispensing justice. This system was self-funding since it was paid for by the people using it; but it was also deeply and inherently corrupt. You could sway the "law" in your favor by offering a larger gift. Interestingly, there was competition in England between different systems of courts, as they vied for jurisdiction over certain types of civil cases. This competition led to an improvement in overall standards of behavior.
Ultimately, we want justice to be impartial, which both means separating the judicial from the executive, and publicly funding the courts to remove the temptation of bribes. This does require additional expense, but the expense is trivial, particularly compared to the cost of something like a standing army. The office of a judge is already an honorable and a desirable one, so the government doesn't need to offer an extravagant salary to get qualified people to serve in it.
The final area of responsibility for government is funding certain public works. When he first brought this up in Book IV, he mentioned that this should cover cases where there is a significant public benefit but it does not generate a profit, and I'd been very curious to see what he considered as an appropriate expenditure. After reading his full examination in Book V, I'm left thinking that Smith doesn't have an overarching philosophy here, and instead looks at each possibility on a case-by-case basis, looking at the facts and evidence before deciding whether that particular venture is better in private hands or in public hands.
As a first example, he thinks that roads are best maintained by local governments, not by private landlords nor by the national government. Roads can be privately funded by toll, which removes the need for additional taxes to support them; but toll roads have a very negative impact on inland commerce, and worse, landlords often have little incentive to actually use toll money to maintain the road. If a road is the only way through, people will have to pay the toll, no matter how terrible the road is. Smith also looks at countries where the national government is responsible for maintaining roads - I think France? In this case, certain famous and high-profile roads are very well-kept, immaculately maintained and ornamented: the roads the sovereign travels on, that foreign diplomats would ride to reach the capital, and so on. But the vast majority of roads in a country are local byways, and these almost always suffer, being totally neglected unless some local person has enough power and influence to persuade the government to maintain it. So anyways, at the end of the day Smith thinks that the local municipality is best equipped to maintain roads in their region, as it is their people who use the roads most. If the municipality charges tolls on the roads, at least those tolls will tend to be well-spent in maintaining the roads; or they could be funded through other means.
For some other larger and more complex work like canals, it might be more appropriate for a private corporation to undertake the work. In this structure they get a charter from the government, spend their private money to build the canal, and then collect private tolls to repay themselves. Unlike the case of roads, these people are well incentivized to keep the canal in good condition: a poorly maintained road is still a road, a poorly maintained canal is nothing. And a private company is more likely to have the technical know-how and expertise to maintain a complex system than the bureaucrats in the capital. But even this has limits. On page 691 he writes:
These companies, though they may, perhaps, have been useful for the first introduction of some branches of commerce, by making, at their own expence, an experiment which the state might not think it prudent to make, have in the long-run proved, universally, either burdensome or useless, and have either mismanaged or confined the trade.
So even though private enterprise may lead to innovation and genuinely useful creations, the private sector isn't reliably good at maintaining those creations: they may atrophy further development, limit its spread, or drive their own finances into ruin. This makes me think of modern telco companies, as well as various utilities, Internet companies and others who create valuable and useful things but then turn bad. So it may make sense to transfer those responsibilities to the government, or into other and more capable hands. I don't recall if Smith makes a specific recommendation here, but I get the impression he would favor an anti-trust type of approach, breaking up de jure or de facto monopolies, or just ousting bad leadership.
Smith later goes on a long, tangential rant about education. It seems like he has some major axes to grind! He complains at great length about how many terrible teachers there are, and basically accuses them of being paid to sit around and do nothing. He seems to think that teachers should be paid directly by their pupils to give them an incentive to teach well. He believes that professors with tenure will naturally be lazy because they get paid the same no matter how much effort they put into teaching. From page 718:
It is the interest of every man to live as much at his ease as he can; and if his emoluments are to be precisely the same, whether he does, or does not perform some very laborious duty, it is certainly his interest, at least as interest is vulgarly understood, either to neglect it altogether, or, if he is subject to some authority which will not suffer him to do this, to perform it in as careless and slovenly a manner as that authority will permit. If he is naturally active and a lover of labour, it is his interest to employ that activity in any way, from which he can derive some advantage, rather than in the performance of his duty, from which he can derive none.
I find it interesting that he seems to single out teachers in particular: in the whole rest of the book, I don't recall him asserting that, say, judges or soldiers or other salaried workers will automatically be incentivized towards shiftlessness without an immediate pecuniary incentive for each specific task they are asked to perform.
He also goes on a long tangent about religion. While he doesn't 100% make this analogy in the book, I thought his description of established religion parallels his description of monopolies. In his telling, a new religious movement starts with fervent adherents who must make new converts through persuasion, using arguments and passion and good deeds to convince newcomers to join the cause. Eventually, this new faith becomes dominant, and they petition for official recognition and support from the sovereign. The sovereign is usually reluctant to grant this, as it reduces his own power, but he must eventually acquiesce because the whole body of the clergy touch on more lives than the king does, so they are too powerful to cross.
But once the clergy's position is secure, they no longer need to persuade, and so those skills atrophy. They become spiritual rent-seekers, collective monetary tithes and earthly privileges, but they are not actively contributing to their flocks. This provides an opening for new religions or new reform movements to spring up. When this happens, the establishment clergy tries to use the powers of the state to crash the upstarts: banning the sect or taking away their property or imprisoning them for sedition. In this dynamic, it is the upstart sects who now have the powers of rhetoric and persuasion, seeking to work on hearts and minds, while the establishment seeks to clamp down with brute power.
Smith looks longingly at Pennsylvania as an example of an alternative. The Quakers are the most numerous sect there, but there is no established religion. He thinks that the results in this state are far better than anywhere in Europe. Each church must actively practice what it preaches and seek to persuade followers. Nobody can rest on the laurels of official government support.
Smith also shows how the path of the clergy paralleled that of the noble landlords during the transition from the middle ages into the modern age. Most people paid their tithe to the clergy "in kind", sending them food or cattle or clothing. The priests and monks couldn't possibly consume all of this by themselves, so they would give most of it away. As a result the church became the major source of charity for the poor, passing on food from those who had it to those who did not. Interestingly, they also provided homes to itinerant knights. Landless knights would ride around from one church or monastery to another. In theory they did this to show religious devotion, but in practice they needed to be fed.
Once the manufactures became established, though, clergy could spend their tithes on extravagant baubles, art and other private goods. They still took in as much tithe as before, but increasingly hoarded the wealth and diminished their charity. That destroyed the Catholic church's popularity with the people, made them appear corrupt and greedy, and paved the way for the reformation.
The final part of the book looks at taxes: how can the government raise money to pay for soldiers and judges and roads, and what are the best ways to do it? He continues taking an empirical look at how taxes have been collected in different nations at different points in history, as well as what the impacts were. From this he derives some general principles and suggestions. This approach reminded me a lot of Piketty's data-driven approach in the first half of Capital in the 21st Centyr.
Smith says that some government expenses may be paid by use fees, like paying a toll to be able to use a road, but there will always be at least some need for a national tax revenue: paying the military and supporting the "dignity of the sovereign". He takes a methodical look at different ways to raise revenue. In parallel with the three sources of income he identified near the start of the book, there can be taxes on rent, taxes on profit, and taxes on wages, as well as taxes that fall indifferently on all three. He also identifies some principles that can be used to evaluate how "proper" a given tax is: it should be predictable, it should be convenient to pay, and it should not discourage useful activities.
Smith goes into a long case study on the taxation of alcohol. At the time he was writing, Britain levied separate taxes on malt, small beer, strong beer and ale. He proposes that all of these taxes could be replaced with a single tax on malt, which is an input to the latter three beverages. This would be simpler, would discourage smuggling, and would close a loophole that allowed rich people living in the countryside to brew beer for local consumption while avoiding most of the tax.
He shows specific figures around how much money had been raised in previous years from the existing taxes, and how much would instead have been raised with his proposed alternative tax. He also considers counter-arguments; for example, while he agrees that the price of malt would definitely rise, malt-makers would still maintain their same profits by passing on the cost of the tax; brewers would have a more expensive input from the taxed malt, but wouldn't need to add a tax to the output, so the result would be a wash for them. The only "losers" would be the informal brewers. As in other case-studies in the book, Smith is careful to identify where a given market is a monopoly market versus one with free competition, as the impacts of taxation on price can be very different between them: again, Smith loves looking at a particular situation in detail, and seems to avoid making overly broad generalizations.
Anyways, this sort of thing can seem like getting lost in the weeds and paying a lot of attention to a situation that just doesn't exist in our world, but I really liked it. Smith is demonstrating a methodical process for examining issues like this, and even an outdated concrete example is a lot more helpful than a purely abstract argument would have been. ("Assuming an economy with perfect competition where everyone has perfect knowledge and always acts in their best interests...")
After a long time spent looking at Britain's system of taxation, including tariffs and excise taxes and stamp duties, he says that Britain has a lot of problems and could do many things better, but also that it's probably the best country in all of Europe when it comes to taxation. He criticizes a lot of the French policies (such as taxes on inland trade between provinces), but then says that they are probably the second-best country when it comes to the least restrictive taxes. I was a little surprised by this conclusion after all the criticism he had offered up to this point, but I really liked it. The book doesn't feel too polemical. He sees problems and wants to fix them, but doesn't get overly dramatic about it.
The very last part of the book looks at the debt of Britain. Here too he looks at the historical evolution of society, essentially saying that in the medieval world there wasn't much worthwhile stuff to spend money on, so sovereigns would naturally hoard treasure troves; in the modern world, there is a huge temptation for governments to spend money on expensive things, with wars being by far the most expensive. He identifies a particular year - I want to say 1688? - as the last year when the British government had a surplus. He shows the pattern whereby Britain runs up an enormous debt in a war, only slowly pays off a small amount of it in the following peace, then runs up an even larger debt in the following war, and so on. For Smith, the key issue is that citizens will feel keen pain and loudly object when new taxes or higher taxes are placed upon them, but won't complain when the government borrows, so nations are relentlessly pushed towards borrowing. He thinks that it would be better for government to raise taxes to fund a war: this would hurt economic development, but he sees the pain of taxes as a feature and not a bug in this case, since it would reduce public appetite for war and encourage governments to end wars as quickly as possible.
This section was very interesting to me for two reasons. First, because of how very familiar it felt - the language, the fear, the outrage, the sense of hopelessness are all 100% like what I read about the debt of the US or the UK today. For example, from page 863:
The progress of the enormous debts which at present oppress, and will in the long-run probably ruin, all the great nations of Europe, has been pretty uniform. Nations, like private men, have generally begun to borrow upon what may be called personal credit.
It's very depressing to see that we still have the same problems all these years later. But, on the other hand, it's weirdly encouraging to see that we still exist to have these worries. Britain has had these huge debts for 338 years... and it's still here, having these big debts. The US has large and growing debts... and has for many years. I do personally think that there are reasons to be concerned about debt and that there are things we should be doing about it (hint: rhymes with "wax the ditch"), but it's kind of humbling and a little reassuring to see someone with the exact same concerns 250 years ago.
Now, once again, here are some random passages I thought were interesting enough to jot down. Starting with pages 667-668:
Men of republican principles have been jealous of a standing army as dangerous to liberty. It certainly is so, wherever the interest of the general and that of the principal officers are not necessarily connected with the support of the constitution of the state. The standing army of Caesar destroyed the Roman republic. The standing army of Cromwel turned the long parliament out of doors. But where the sovereign himself is the general, and the principal nobility and gentry of the country the chief officers of the army; where the military force is placed under the command of those who have the greatest interest in the support of the civil authority, because they have themselves the greatest share of that authority, a standing army can never be dangerous to liberty. On the contrary, it may in some cases be favourable to liberty. The security which it gives to the sovereign renders unnecessary that troublesome jealousy, which, in some modern republics, seems to watch over the minutest actions, and to be at all times ready to disturb the peace of every citizen. Where the security of the magistrate, though supported by the principal people of the country, is endangered by every popular discontent; where a small tumult is capable of bringing about in a few hours a great revolution, the whole authority of government must be employed to suppress and punish every murmur and complaint against it. To a sovereign, on the contrary, who feels himself supported, not only by the natural aristocracy of the country, but by a well-regulated standing army, the rudest, the most groundless, and the most licentious remonstrances can give little disturbance. He can safely pardon or neglect them, and his consciousness of his own superiority naturally disposes him to do so.
This is a pretty interesting argument, and one I don't think an American would make. His idea is that in the absence of the real physical security that a standing army provides, the integrity of the state itself is much weaker, and so the leaders of an army-less nation must more harshly crack down on internal criticism and dissent that has the potential to tear the state apart. But if the leader knows that the state is secure, he will turn a benign eye towards free speech, even that critical of the regime. So the presence of a standing army enables more internal freedom than the absence of one does.
On page 670:
Wherever there is great property, there is great inequality. For one very rich man, there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many. The affluence of the rich excites the indignation of the poor, who are often both driven by want, and prompted by envy, to invade his possessions. It is only under the shelter of the civil magistrate that the owner of that valuable property [...] can sleep a single night in security. He [...] can be protected only by the powerful arm of the civil magistrate continually held up. [...] The acquisition of valuable and extensive property, therefore, necessarily requires the establishment of civil government. Where there is no property, or at least none that exceeds the value of two or three days labour, civil government is not so necessary.
As a minor technical note, I'm interested by his 1-to-500 ratio given here; I'm reminded of his assertion in The Theory of Moral Sentiment that for every unhappy person there are 20 happy people. This wealth assertion seems more provable than his happiness one but there's no real data to back it up, or even an explanation of what he considers "very rich" or "poor". But more importantly, this passage is really interesting to me as another example of me encountering the flip side to a well-known argument, as with William Bernstein's positive portrayal of the financial benefits of compounding investment being just another perspective of the phenomenon Thomas Piketty identifies as the increase of inequality. Here it sounds like Adam Smith is posting "The only purpose of the state is to protect private wealth [complimentary]".
On a similar note, on page 674 he writes:
The rich, in particular, are necessarily interested to support that order of things, which can alone secure them in the possession of their own advantages. Men of inferior wealth combine to defend those of superior wealth in the possession of their property, in order that men of superior wealth may combine to defend them in the possession of theirs. [...] Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all.
This seems like a pretty bald statement. Government exists as an alliance between the ultra-wealthy and the petite-bourgeoise against the poor. Workers with a few grand in their 401(k) will defend the rights of billionaires, and billionaires will uphold the property-rights regime. There doesn't seem to be any daylight between Smith and Marx in this analysis, the only difference being that Smith is dispassionately explaining history while Marx proposes alternatives.
Shifting topics, on page 706 he writes:
The increase of demand, besides, though in the beginning it may sometimes raise the price of goods, never fails to lower it in the long run. It encourages production, and thereby increases the competition of the producers, who, in order to undersell one another, have recourse to new divisions of labour and new improvements of art, which might never otherwise have been thought of.
This is the kind of nuts-and-bolts thing I love reading about. There wasn't as much of this stuff in Book V as in the first few volumes. I hadn't thought specifically about this scenario before, but Smith's description makes intuitive sense to me. I think we see this pattern in almost every new type of product, with recent examples including clean energy, electric vehicles, and computers. Hopefully we're in that same cycle with GPUs and RAM.
Pages 724-725:
Speculative systems have in all ages of the world been adopted for reasons too frivolous to have determined the judgment of any man of common sense, in a matter of the smallest pecuniary interest. Gross sophistry has scarce ever had any influence upon the opinions of mankind, except in matters of philosophy and speculation; and in these it has frequently had the greatest.
I think this is part of his same rant about teachers, but this particular phrase jumped out at me. I'm reminded of the saying "put your money where your mouth is." There are an infinite number of possible theoretical systems that one could debate, and a far far fewer number of reliable concrete systems that people can actually rely on in matters of importance for their daily lives.
Moving onto the topic of taxation, on page 796 he writes:
Ground-rents seem, in this respect, a more proper subject of peculiar taxation than even the ordinary rent of land. The ordinary rent of land is, in many cases, owing partly at least to the attention and good management of the landlord. A very heavy tax might discourage too much this attention and good management. Ground-rents, so far as they exceed the ordinary rent of land, are altogether owing to the good government of the sovereign, which, by protecting the industry either of the whole people, or of the inhabitants of some particular place, enables them to pay so much more than its real value for the ground which they build their houses upon. [...] Nothing can be more reasonable than that a fund which owes its existence to the good government of the state, should be taxed peculiarly, or should contribute something more than the greater part of other funds, towards the support of that government.
I'm guilty of constantly looking to correlate ideas from this 250-year-old book onto our present political and economic world, and I need to keep reminding myself that I shouldn't do that. But I do it anyways. Here, I think his arguments would map very cleanly onto things like taxes on inherited wealth. And while Smith doesn't consider progressive taxation in this book, or even income taxes, I think they intuitively make sense for the same reason as this passage. People who have done very well and have earned a lot of money have benefited enormously from the system established and upheld by our government: security, property rights, markets, stable currency, an educated workforce, wealthy consumers, etc. Nothing could be more reasonable than having the people who benefit most from the system contribute more than others to support that system.
Soon after, on page 799 he continues:
The interest of money seems at first sight a subject equally capable of being taxed directly as the rent of land. Like the rent of land, it is a neat produce which remains after completely compensating the whole risk and trouble of employing the stock. As a tax upon the rent of land cannot raise rents; because the neat produce which remains after replacing the stock of the farmer, together with his reasonable profit, cannot be greater after the tax than before it: so, for the same reason, a tax upon the interest of money could not raise the rate of interest; the quantity of stock or money in the country, like the quantity of land, being supposed to remain the same after the tax as before it.
While he'll question this later, I did like his phrasing here; essentially taxing the direct gains on existing money, in the form of interest payments. On taxation in general, he wants to minimize taxation that will discourage economic activity: like, if you tax the exports of plows, then people will build fewer plows. But taxing interest is "safe", it won't raise interest rates.
I paused at this on the very next page, 800:
Land is a subject which cannot be removed, whereas stock easily may. The proprietor of land is necessarily a citizen of the particular country in which his estate lies. The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax, and would remove his stock to some other country where he could either carry on his business, or enjoy his fortune more at his ease. By removing his stock he would put an end to all the industry which it had maintained in the country which he left.
The argument here is very familiar to me, but I was not expecting to read it in this old book. Through my readings of modern authors like Piketty and Pistor, I've gotten the impression that the threat of "capital flight" is a modern phenomenon, perhaps starting in the 1970s or so, and caused by the liberalization of capital flows such as those within the EU and between nations. But Smith is making the exact same argument here: if countries impose large taxes on wealth, then the wealthy will pack up their toys and leave for another country without those taxes, or with lower taxes.
Musing on this more, perhaps the difference between the 18th century and the 21st century has more to do with degree than with kind. In Smith's day, it was possible for a wealthy merchant to relocate in the way a wealthy noble could not; but it would still be a very involved operation. He would need to sell all of his goods and bonds, withdraw from all of his accounts, exchange all of his paper money for gold, put the gold into chests, sail on a ship to a new country, then use that gold to rebuild his operations. Today, you can just wire money electronically from one bank to another. We also have made it trivially easy to, say, earn money from economic activity in the US, store that money in an Ireland bank, and actually live and spend your money in France. Back in Smith's day you had to execute the reality of relocating your person and your business, which was possible but not trivial; today you can easily execute the fiction of relocating without actually disrupting your daily life.
More taxes! While discussing "stamp duties" related to the transfer (buying and selling) of real property, he writes on page 814:
Such taxes, even when they are proportioned to the value of the property transferred, are still unequal; the frequency of transference not being always equal in property of equal value.
This seems to be a basic but worthy observation that taxes which seem equal are not always fair. Here he's narrowly considering the case of taxes on sales of real estate. Large wealthy families with big estates may go generations without major turnover in their land; less wealthy families may buy and small small parcels more frequently. Even if you have a uniform transfer tax based on the number of acres, the smaller families bear more of the overall tax load. In modern times, I would look at something like the "flat tax" proposals we had a few decades ago. The top-line description intuitively sounds fair, but the real burden falls overwhelmingly on the poor to the benefit of the rich.
Page 833:
Heavy duties being imposed upon almost all goods imported, our merchant importers smuggle as much, and make entry of as little as they can. Our merchant exporters, on the contrary, make entry of more than they export; sometimes out of vanity, and to pass for great dealers in goods which pay no duty gain a bounty back. Our exports, in consequence of these different frauds, appear upon the custom-house books greatly to overbalance our imports, to the unspeakable comfort of those politicians, who measure the national prosperity by what they call the balance of trade.
This triggered a few contemporary thoughts for me. First, who knows what the tariff regime will look like in the coming years (or weeks), but it is natural to assume that there will be an increase in smuggling and fraud to circumvent those higher duties. Secondly, I think that as in Smith's day our official balance of trade does not align with reality, although in our case it skews in the opposite direction: global companies in general, and tech companies in particular, are highly incentivized to claim profits as originating in offshore tax havens, which creates an accounting fiction of outflows of money (imports of technology), while the reality is the opposite (US companies gaining wealth, exporting technology generated here). And finally, (certain) politicians continue to stupidly focus on an oversimplified and inaccurate measure of the "balance of trade" instead of the more complex but infinitely more meaningful panoply of real economic activity.
Page 835:
High taxes, sometimes by diminishing the consumption of the taxed commodities, and sometimes by encouraging smuggling, frequently afford a smaller revenue to government than what might be drawn from more moderate taxes.
This is the Laffer Curve, which in the abstract is certainly true, but of course how "high" we are talking about here is never clearly stated, in Smith's day or our own. I'm generally pro-higher-taxes, but particularly when it comes to things like excise taxes, sales taxes and tariffs, we do need to keep in mind that beyond a certain point they depress the underlying economic activity to the point where total receipts fall. But I'll also tangentially note that some modern progressive would argue that the social benefits of high taxation are more important than maximizing revenue. Even in Smith's day this could be applied to "sin taxes", like a higher taxation on hard liquor to discourage drunkenness, or modern taxes on tobacco. We could get more revenue from our tobacco taxes if they were lower, but the revenue isn't the point, discouraging smoking is. Likewise, the top marginal income tax rate in the US in the 1950s was over 90%. This depressed income tax receipts, since it discouraged companies from paying anyone enough to trigger that top rate; but that was the point, we wanted a more equal society with fewer super-rich and super-poor people.
Page 848:
But though this rise of price in a foreign commodity may encourage domestic industry in one particular branch, it necessarily discourages that industry in almost every other. The dearer the Birmingham manufacturer buys his foreign wine, the cheaper he necessarily sells that part of his hardware with which, or what comes to the same thing, with the price of which he buys it. That part of his hardware, therefore, becomes of less value to him, and he has less encouragement to work at it. The dearer the consumers in one country pay for the surplus produce of another, the cheaper they necessarily sell that part of their own surplus produce with which, or, what comes to the same thing, with the price of which they buy it.
I don't understand this at all! I re-read this passage three times and I still can't make sense of it. I think it's the one part in this whole book that really baffles me - I don't necessarily agree with everything Smith writes, but usually I can at least follow what he's trying to argue. Here he seems to be saying that if you need to pay more to consume a foreign good (in this case a pure luxury, French wine), then you will charge less for the goods that you sell (in this case, kitchen utensils). I would think that, if anything, it would be the opposite: you would charge more for the thing you sell in order to afford the thing that you buy. Or you would keep the price the same but work harder to sell more of it. Or cut your consumption of wine. All of those make sense to me, but I can't track what Smith is saying. (If you know, please tell me in the comments! Please!)
From page 862:
Commerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice; in which the people do not feel themselves secure in the possession of their property; in which the faith of contracts is not supported by law; and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts from all those who are able to pay. [...] The same confidence which disposes great merchants and manufacturers upon ordinary occasions, to trust their property to the protection of a particular government, disposes them, upon extraordinary occasions, to trust that government with the use of their property. [...] The merchant or monied man makes money by lending money to government, and instead of diminishing, increases his trading capital.
This brief paragraph is a great capsule summary of the first and third conditions of prosperity that William Bernstein outlined in The Birth of Plenty. Strong property rights are a prerequisite, and so is a functioning and trustworthy banking system. Government bonds are the prime mover that enable creation of capital markets and enables a nation to reinvest in itself.
My last note comes from pages 896-897
It is not contrary to justice that both Ireland and America should contribute towards the discharge of the public debt of Great Britain. That debt has been contracted in support of the government established by the Revolution, a government to which the protestants of Ireland owe, not only the whole authority which they at present enjoy in their own country, but every security which they possess for their liberty, their property, and their religion.
Smith has written a lot about America in this book, but very little about Ireland, and reading this passage makes me realize just how little I know about Ireland in general, and in particular the history of the union with Britain. I know it's been bad! I have almost no context for the precise course of events or even the centuries in which things happened. While not directly related to this book, I want to get at least a cursory understanding of this history.
The book as a whole feels like it kind of peters out. He wanted to write about taxes, so he wrote about taxes, and now he's done! There isn't a summing-up or a next-steps like I would expect in a more modern book. Which is fine, that isn't his style.
So! Am I glad I read The Wealth of Nations?
Yes! I think three things hit me from this book. First, it being a foundational text, it helped create the language and set the stage for all the other economic books that have been written in the centuries since. I sometimes think of key books such as, say, the Bible as being like "oxygen", something that is everywhere all around us to the point we don't recognize it, even though it has defined everything about our surroundings. But, secondly, I am struck by how much from this musty old book is still 100% the way we understand things today. Unlike, say, psychology or epidemiology or astronomy, where the early practitioners were very far off the mark and basically none of their ideas still stand today, when it comes to economics, probably something like 80% (I made that up) of Smith's book is still how mainstream economists in 2026 understand the world. The purpose of money, the role of currency, the benefits of specialization, the problems with monopolies, the impacts of taxation, the role of rent and capital and profit, the tension between workers and owners... on and on and on, it seems like people back then had it all figured out. We've built on it and made some edits, but the overall framework is still intact. Third and finally, Smith is a pretty good explainer. I really enjoyed his broad and epic look at the history of humanity, and how economics developed alongside our evolution into more technologically advanced societies. A true scholar of the Enlightenment, Smith is great at looking at specific incidents and collecting evidence from them. He gracefully shifts between granular empirical data and persuasive grand theories.
And some surprises from reading this book:
I was expecting a much bigger role from The Invisible Hand. It's only mentioned once in all 950 pages of this book, and then almost as an aside. The Invisible Hand actually was much more prominent in The Theory of Moral Sentiments, with a more direct explanation of the metaphor. I think that the idea behind The Invisible Hand underlies much of The Wealth of Nations, but it doesn't appear on-screen, as it were, all that much.
I was kind of anticipating this based on recent online comments, but overall I found The Wealth of Nations to be a much more progressive book than its reputation would suggest. Whenever he displays opinions and sympathies, Smith is always more on the side of the poor, of the enslaved, of the workers. He kind of admires the impacts of bourgeoisie, but not their characters, and makes a point at underlining how they are often motivated by pure greed. And he reserves his greatest contempt for the truly wealthy landlords, the established church, and other parasitical individuals and organizations. Having read both books, I can now see how The Wealth of Nations does build on The Theory of Moral Sentiments. He sees economic development as a way to enrich and improve the lives of the masses of people, and studies how certain actions we take as a society can assist or deter that improvement, as well as how that improvement can be its own ineluctable force.
I was also kind of surprised by how many modern writings seem to not just build on, but practically repeat, passages in this book. In my previous post I commented on how Smith makes equivalent arguments to Thomas Piketty about the relationship between economic growth and inequality. In this section, I was struck on how cleanly Smith seems to anticipate The Birth of Plenty; he doesn't address railroads or telegraphs since they hadn't been invented yet, but does shout out navigable rivers and coastlines, and completely reiterates (pre-iterates?) Bernstein's primal attention given to property rights and banking as key pillars for prosperity.
So, yeah! I kind of can't believe I've spent five months reading Adam Smith, but I have thoroughly enjoyed it. It's further cementing many ideas that I've read from secondary sources over the years, not just about economics but also about history and military conquest and scientific development. While not always the most gripping prose, he's capable of striking rhetorical flourishes at times, and always has a nice, authoritative and persuasive voice. It also feels nice to peer behind the accumulated trappings of reputation he has collected over the years and see the curious, idiosyncratic man who started this whole project of understanding how and why our economies work.
