Adam Smith:

The Wealth of Nations

What is wealth? How should we measure the wealth of a country?

Background

Adam Smith (1723 – 17 July 1790) was a contemporary of David Hume and also part of the Scottish enlightenment. He wrote a very influential tract about morality called The Theory of Moral Sentiments, but he is most famous for his work in political economy.

Mercantilism

Mercantilism was the dominant economic ideology of the time. It was the belief that a country needs to have more wealth coming in than going out. (i.e. the idea that you are in competition with other countries.) And had its roots in the Tudor period and the reactions to the colonisations of what became known as 'America'.

We must always take heed that we buy no more from strangers than we sell them, for so should we impoverish ourselves and enrich them.

-Anonymous, Discourse of the Common Weal of this Realm of England, 1549

If you believe in Mercantilism, then it makes sense to invade other countries (or send your companies/pirates over there) to control their wealth.

In return for invading and controlling the wealth of other countries, traders were given monopolies by their Kings and Queens. (A monopoly is when you are the only person allowed to trade in a particular area/good.)

In ‘the mercantile system’ private companies lobbied governments for the right to operate exclusive trade routes, or to be the only importers or exporters of goods, while closed guilds controlled the flow of products and employment within domestic markets.

This was good for the companies because when there is competition, the prices go down. When people have monopolies, they can put the prices up.

Adam Smtih's argument

Adam Smith argued that Mercantilism was nonsense. He argued that it resulted in

…cartels and monopolies.
…the customers being ripped off.
…violence and war.

His solution to these problems was that the wealth of a nation should not be measured in terms of money coming in and out, but in terms of the annual exchangeable value of the product of its work.

Cartels, monopolies, and protected industries should be broken and competitive markets should be encouraged.

He believed that the idea that mercantilism was good for the country was dangerous. It was good for the companies, but terrible for the ordinary people who had to buy worse goods at inflated prices.

If, he argued, we had competitive markets, then an 'invisible hand' would guide the businesses to work more efficiently for the people of a country.

But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

-Adam Smtih, The Wealth of Nations [Par. IV.2.9]

Discussion: was Adam Smith a Libertarian?

Adam Smith's name is often associated with deregulation and libertarianism (the view that the government should have less control over people's lives. It is based on the idea of maximum possible amount of liberty.) But this isn't exactly correct.

Smith thought that the government had some very important roles to play in the lives of the citizens, especially in protecting them from 'the injustice of oppression'. For example:

setting standards for various goods and services. He supported a “publick stamp” to guarantee the quality of money and the size or quality of linen and woollen cloth because he thought is was essential to protect the people from fraud.
He argued that private banks should have their power to issue promissory notes (a letter guarenteeing a sum of money - essentially lending money) limited, comparing such a regulation to laws that require the building of walls to stop the spread of a fire.
He thought that the government should protect itself against religious fanaticism by requiring that people study science and philosophy before being licensed to exercise any of the “liberal profession[s]” or to hold “any honourable office of trust or profit.” (V.i.g.14, 796).
Smith also argued that the government had the duty to...

erect [...] and maintain[...] certain publick works and certain publick 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.

-(IV.ix.51, 687-8)

Some of these things he think should be done through private funding, like canals and the education of the wealthy. But others he think need to be done by the governments because otherwise they might be unsafe or because the people who will benefit won't be able to set them up on their own, for example schools. Smith's proposal for a public school system throughout Britain was extremely radical for the time and would have invovled a huge increase in government spending.

Tasks

Explain the idea of Mercantilism .
Explain Adam Smith’s arguments against Mercantilism.
Do you find his views convincing? Explain your answer.

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