The wealth of nations adams smith

Wealth The

ofNations

Adam Smith

Wealth The Nations of Adam Smith

Hh

The Wealth of Nations is a treasured classic of political economy. First published in

March of 1776, Adam Smith wrote the book to influence a special audience –

the British Parliament – and its arguments in the early spring of that year pressed

for peace and cooperation with Britain's colonies rather than war.

Smith's message was that economic exploitation, through the monopoly trade of

empire, stifled wealth-creation in both home and foreign lands. Moreover,

protectionism preserved the status quo, and privileged a few elites at the expense

of long run growth.

Smith wrote, "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."

Hh Harriman House Publishing

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This edition, based on the classic Cannan version of the text, includes a foreword

by George Osborne MP and an introduction by Jonathan B. Wight, University

of Richmond, which aims to place the work in a business context. Wight also

provides an invaluable ‘Notable Quotes’ section where he extracts and

categorises some of the most famous and pertinent sections of Smith’s work.

This classic work is as essential today as it was when it first written.

On the division of labour:

“The greatest improvement in the

productive powers of labour, and the greater

part of the skill, dexterity, and judgment with

which it is any where directed, or applied,

seem to have been the effects of the division

of labour.”

On the role of profit:

“It is the stock that is employed for the sake

of profit, which puts into motion the greater

part of the useful labour of every society.

The plans and projects of the employers of

stock regulate and direct all the most

important operations of labour, and profit is

the end proposed by all those plans and

projects.”

On international trade:

“It is the maxim of every prudent master of

a family, never to attempt to make at home

what it will cost him more to make than to

buy.... What is prudence in the conduct of

every private family, can scarce be folly in

that of a great kingdom.”

£19.99

Notable quotes

“For me perhaps the most compelling reason why The

Wealth of Nations is still relevant today is that to read it is to

invite inspiration – a precious commodity in any age.”

George Osborne, MP

Adam Smith was born in June 1723 in Kirkcaldy,

Scotland. He studied at the University of

Glasgow, graduating in 1740 and then went on to

Balliol College, Oxford. In 1751, Smith was

elected a professor at the University of Glasgow,

and the following year accepted its Chair of

Moral Philosophy. Smith’s course included

lectures on natural religion, ethics, jurisprudence,

and political economy (the latter providing the

future foundation for The Wealth of Nations).

While modern readers may know of Adam Smith

because of The Wealth of Nations, his early renown

during his life came from The Theory of Moral

Sentiments (1759), a book that addresses the ethical

foundations of human society. Based on the

reputation of this work, Smith was offered a

position as tutor to the stepson of Lord Charles

Townshend, the Duke of Buccleuch. This

afforded him the opportunity to travel to Europe

for several years, where he met the leaders of the

Enlightenment movement.

In 1767, Smith received a life pension from the

Duke and returned to Kirkcaldy. Inspired by the

French reformers he had met, Smith began to

develop his Glasgow economics lectures into a

book on commerce. Intellectuals greeted the book

with acclaim, but British legislators were not

swayed. The Wealth of Nations did give comfort to

the colonial revolutionaries, however, as attested

by the number of America’s founding fathers who

bought it for their libraries.

In 1778, Smith moved to Edinburgh to accept an

appointment as Commissioner of Customs for

Scotland.

He died on July 17, 1790, leaving instructions to

burn his unfinished manuscripts. One exception

was the Essays on Philosophical Subjects, which was

published posthumously in 1795. This work

contains a number of Smith’s important articles

on science, the arts, and metaphysics.

Adam Smith

Hh

WoN_fullcover:Layout 1 18/8/08 15:36 Page 1

An Inquiry into

the Nature and Causes of

The Wealth of Nations

BY

ADAM SMITH

HARRIMAN HOUSE LTD

3A Penns Road

Petersfield

Hampshire

GU32 2EW

Tel: +44 (0)1730 233870

Fax: +44 (0)1730 233880

Originally published in 1776.

This edition published by Harriman House, 2007

© Harriman House Ltd.

ISBN: 1-9056-4126-5

ISBN 13: 978-1905641-26-0

British Library Cataloguing in Publication Data

A CIP catalogue record for this book can be obtained from the British Library.

All rights reserved; no part of this publication may be reproduced, stored

in a retrieval system, or transmitted in any form or by any means, electronic,

mechanical, photocopying, recording, or otherwise without the prior written

permission of the Publisher. This book may not be lent, resold, hired out or

otherwise disposed of by way of trade in any form of binding or cover other than

that in which it is published without the prior written consent of the Publisher.

Printed and bound in Great Britain by the CPI Group ‘Bath Press’,

No responsibility for loss occasioned to any person or corporate body

acting or refraining to act as a result of reading material in this book can

be accepted by the Publisher or by the Author.

Contents

Foreword by George Osborne, MP ix

Editor’s Introduction by Jonathan B.Wight, University of Richmond xi

Notes on the Text xix

Notable Quotes from The Wealth of Nations xxi

Introduction and Plan of the Work xxxix

Contents to The Wealth of Nations

Book I

Of the Causes of Improvement in the Productive Powers of Labour, and of

the Order According to Which its Produce is Naturally Distributed Among

the Different Ranks of the People.

CHAPTER I

Of the Division of Labour 3

CHAPTER II

Of the Principle which goves Occasion to the Division of Labour 9

CHAPTER III

That the Division of labour is Limited by the Extent of the Market 12

CHAPTER IV

Of the Origin and Use of Money 15

CHAPTER V

Of the Real and Nominal Price of Commodities, or of their Price in Labour,

and their Price in Money 20

iii

CHAPTER VI

Of the Component parts of the Price of Commodities 31

CHAPTER VII

Of the Natural and Market Price of Commodities 36

CHAPTER VIII

Of the Wages of Labour 43

CHAPTER IX

Of the Profits of Stock 58

CHAPTER X

Of Wages and Profit in the Different Employments of Labour and Stock 65

PART I – Inequalities arising from the nature of the employments themselves 65

PART II – Inequalities occasioned by the Policy of Europe 78

CHAPTER XI

Of the Rent of Land 94

PART I – Of the Produce of Land which always affords Rent 95

PART II – Of the Produce of Land, which sometimes does,

and sometimes does not, afford Rent 105

PART III – Of the variations in the Proportion between the respective Values

of that sort of Produce which always affords Rent, and of that which sometimes

does, and sometimes does not, afford Rent 114

FIRST PERIOD 115

SECOND PERIOD 124

THIRD PERIOD 125

CONCLUSION of the CHAPTER 161

PRICES OF WHEAT 163

iv

The Wealth of Nations

Book II

Of the Nature, Accululation, and Employment of Stock

Introduction 175

CHAPTER I

Of the Division of Stock 177

CHAPTER II

Of Money, Considered as a Particular Branch of theGeneral Stock

of the Society, or of the Expense of Maintaining the National Capital 182

CHAPTER III

Of the Accumulation of Capital, or of Productive and

Unproductive Labour 212

CHAPTER IV

Of Stock Lent at Interest 225

CHAPTER V

Of the Different Employment of Capitals 231

Book III

Of the Different Progress of Opulence in Different Nations

CHAPTER I

Of the Natural Progress of Opulence 245

CHAPTER II

Of the Discouragement of Agriculture in the Ancient State of Europe,

after the Fall of the Roman Empire 249

CHAPTER III

Of the Rise and Progress of Cities and Towns, after the Fall of

the Roman Empire 257

v

Contents

CHAPTER IV

How the Commerce of the Towns Contributed to the

Improvement of the country 264

Book IV

Of Systems of Political Economy

Introduction 275

CHAPTER I

Of the Principle of the Commercial or Mercantile System 276

CHAPTER II

Of Restraints upon the Importation from Foreign Countries of such

Goods can be Produced at Home 291

CHAPTER III

Of the extraordinary Restraints upon the Importation of Goods of

almost all Kinds, from those Countries with which the Balance is

supposed to be Disadvantageous 304

PART I – Of the Unreasonableness of those Restraints, even upon the

Principles of the Commercial System 304

PART II – Of the Unreasonableness of those extraordinary

Restraints, upon other Principles 314

CHAPTER IV

Of Drawbacks 322

CHAPTER V

Of Bounties 326

CHAPTER VI

Of Treaties of Commerce 351

PART. I 352

PART. II 352

PART. III 352

vi

The Wealth of Nations

CHAPTER VII

Of Colonies 359

PART I – Of the Motives for Establishing New Colonies 359

PART II – Causes of the Prosperity of New Colonies 365

PART III – Of the Advantages which Europe has derived From

the Discovery of America, and from that of a Passage to the East

Indies by the Cape of Good Hope 381

CHAPTER VIII

Conclusion of the Mercantile System 415

CHAPTER IX

Of the Agricultural Systems, or of those Systems of Political Economy

which Represent the Produce of Land, as either the Sole or the Principle

Source of the Revenue and Wealth of Every Country 428

Appendix to Book IV 445

Book V

Of the Revenue of the Sovereign or Commonwealth

CHAPTER I

Of the Expenses of the Sovereign or Commonwealth 451

PART I – Of the Expense of Defence 451

PART II – Of the Expense of Justice 462

PART III – Of the Expense of public Works and public Institutions 470

ARTICLE I – Of the public Works and Institutions for facilitating

the Commerce of the Society, And, first, of those which are necessary

for facilitating Commerce in general 471

ARTICLE II – Of the Expense of the Institution for the Education of Youth 493

ARTICLE III – Of the Expense of the Institutions for the Instruction

of People of all Ages 510

PART IV – Of the Expense of supporting the Dignity of the Sovereign 527

CONCLUSION 528

vii

Contents

CHAPTER II

Of the Sources of the General or Public Revenue of the Society 530

PART I – Of the Funds, or Sources, of Revenue, which may peculiarly

belong to the Sovereign or Commonwealth 530

PART II – Of Taxes 535

ARTICLE I – Taxes upon Rent — Taxes upon the Rent of Land 537

ARTICLE II – Taxes upon Profit, or upon the Revenue arising from Stock 550

APPENDIX TO ARTICLES I AND II – Taxes upon the Capital Value of

Lands, Houses, and Stock 558

ARTICLE III – Taxes upon the Wages of Labour 562

ARTICLE IV – Taxes which it is intended should fall indifferently

upon every different Species of Revenue 564

CHAPTER III

Of Public Debts 592

INDEX 621

viii

The Wealth of Nations

Foreword

What can The Wealth of Nations teach us today?

After all, it was written at the very beginning of the industrial age, in a world where

agriculture was the dominant industry and where information travelled only as quickly as

the fastest horse or the swiftest sailing boat. How, you may ask, can a work about the

economics of that age be relevant to today’s post-industrial world, where capitals flows

around the world at the touch of a button and where communication travels at the speed of

light?

Yet The Wealth of Nations tells us as much about the world we live in today as the world in

which it was written. Adam Smith’s genius was to address the eternal questions: how to

increase the wealth of nations and how to improve the prosperity of peoples all over the

world.

His answers were universal too. He recognised that it is the freedom to trade and compete

that promotes individual interests and which also generates the wealth of nations. The truth

of this insight has been borne out by over two centuries of evidence - countries that suppress

individuals’ freedoms and curtail the operation of the free market are typically much poorer

than those that have followed the advice of Adam Smith.

Adam Smith understood that in a market system, self-interest also serves the wider public

interest. Giving individuals the freedom to engage in voluntary economic interaction could

advance the wider interests of society. People work to earn money - which after all, serves

their own rational self-interest. But in a competitive market, earning money means

providing something that others value. And thus society as a whole benefits from private

enterprise. As Adam Smith memorably put it:

It is not from the benevolence of the butcher, the brewer, or the baker, that

we expect our dinner, but from their regard to their own interest. (pp. 9-10)

Even today, this advice is ignored. The response of too many to globalisation is to erect

trade barriers, pass new employment protection laws and try to shut out the market. They

should listen to the teachings of The Wealth of Nations, which show us that openness to

trade benefits all the parties involved - not just the side that currently enjoys a competitive

edge. As we fight to abolish Western agricultural subsidies, combat economic nationalism

in Europe and battle against higher taxation and regulation at home, Smith’s lucid defence

of free trade and competition are as powerful as ever.

Of course, Adam Smith was no utopian. He was keenly aware of the limitations of the

“invisible hand” – and therefore understood that effective institutional infrastructure is

required to ensure the operation of a free and fair market. Unfettered markets tended

towards monopoly, he wrote, and so proportionate government action is needed to create a

clear and stable framework that enables free competition to take place. Getting that balance

ix

right remains as important in the age of the software giants as it was in the age of the cotton

kings.

For me, however, perhaps the most compelling reason why The Wealth of Nations is still

relevant today is that to read it is to invite inspiration – a precious commodity in any age.

Inspiration to continue Adam Smith's battle for free and open markets.

Inspiration to develop solutions and policies that increase individual freedoms.

And inspiration to implement policies that increase the wealth of nations and peoples the

world over.

George Osborne, MP

x

The Wealth of Nations

Introduction

The Wealth of Nations is a treasured classic of political economy. First published in March

of 1776, Adam Smith wrote the book to influence a special audience—the British

Parliament—and its arguments in the early spring of that year pressed for peace and coop￾eration with Britain’s colonies rather than war. Smith’s message was that economic

exploitation, through the monopoly trade of empire, stifled wealth-creation in both home

and foreign lands. Moreover, protectionism preserved the status quo, and privileged a few

elites at the expense of long run growth. Smith wrote, “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.”

Smith was a Scottish reformer whose sympathies lay with downtrodden working people.

The Wealth of Nations was a polemic on the basic rights of human beings to improve their

material lives in ways that promoted freedom and dignity. Smith wrote:

To prohibit a great people, however, from making all that they can of every

part of their own produce, or from employing their stock and industry in the

way that they judge most advantageous to themselves, is a manifest viola￾tion of the most sacred rights of mankind. (p. 372)

Smith had an inspired vision: that allowing the common person the freedom to express him￾self through market activities would unleash a creativity and ingenuity that would stun the

legislators. Indeed, various countries have tried this experiment, notably China. While mil￾lions of peasants starved to death in the misnamed “Great Leap Forward” of central plan￾ning in the early 1960s, the loosening of state controls after 1978 triggered a surge of out￾put in small private plots. Likewise in India after liberal reforms began in 1991, output and

wealth-creation soared. More mundanely, the freedom to create and trade via the internet

has generated a flood of start-up businesses, non-profit organizations, and blogs for people

seeking merely to express themselves.

Yet we should quickly (and wisely) note that wealth creation is not Smith’s only, or even

ultimate, objective. Humans—in Smith’s mind—are not the grubby creatures of homo eco￾nomicus often depicted in economics textbooks. Rather, humans make complex choices

within social groups. A community of people pursuing their own good must grapple with

the meaning of justice; they must promote institutions of self control so their self interest

does not degenerate into selfishness. In his writings, Smith develops at length his concep￾tion of how ethical deliberation arises in a good society.

Readers of this book may be surprised to discover that Smith anticipated and shared many

concerns about capitalism (although his term for it was “commercial society”). He worried

about the power that big corporations could have in conspiring to create cartels. He noted

xi

The Wealth of Nations

xii

that investments vital to the public interest might not be undertaken if profit were the only

motive. He did not think the market system was perfect; it needed reasonable regulation to

ensure the public safety and well being. Nevertheless, Smith defended markets because he

thought they were generally the most reliable mechanism for lifting people out of poverty.

Thus, he levelled some of his harshest criticisms at employers whose constant aim seemed

to be to depress the wages of workers. By contrast, Smith advocated paying workers higher

wages to promote better health and productivity, and he also supported a system of joint

public-private education to prevent repetitive labour from degrading workers’ human capi￾tal.

While Smith was cynical about the motives for state intervention, he acknowledged a legit￾imate role for government when private interests diverged significantly from the public’s

interest. Generally, however, Smith believed that a “great society” would flourish best in a

“system of natural liberty” in which government focused on executing three duties of great

importance—namely, providing for the national defence, establishing a fair system of jus￾tice, and carrying out public works.

Some current critics of globalisation claim that exploitation lies at the heart of exchange

between rich and poor countries. The Wealth of Nations attacks colonialism and mercantil￾ism on these grounds. Smith presents a vision of economic development from the bottom￾up, with competitive markets providing the means by which the working poor around the

world can improve their skills and living standards. To Smith, concern for people on the low

rung of the economic ladder requires not platitudes and handouts, but pragmatic action to

break down local systems of exploitation that arise from monopoly. Giving people the

opportunity to succeed develops self respect rather than numbing dependency.

We turn to a discussion of Smith’s life, his other major works, some key concepts, and the

contents of the book.

Life and works

Adam Smith was born in June 1723 in the fishing village of Kirkcaldy, Scotland, a few

months after his father’s death. His widowed mother raised him alone and saw that he

received an excellent primary education. He pursued further studies at the University of

Glasgow, graduating in 1740 under the tutelage of the noted moral philosopher Frances

Hutchinson. Preparing for a life in the ministry, Smith travelled to Balliol College, Oxford,

to start the period that would rank as the lowest point of his life. Not only were Scots dis￾criminated against in England during this time of rising political and religious passions, but

Smith’s tutors were narrow-minded and lazy. Smith later castigated Oxford and its faculty

(see the Notable Quotes appendix).

After completing his degree, Smith abandoned the ministry and returned to live with his

mother in Kirkcaldy. He continued his studies and after a few years made his way to nearby

Edinburgh where his entrepreneurial spirit manifested itself in a series of public lectures on

rhetoric and other topics for fee. Smith enjoyed a growing reputation that led to his friend￾ship with David Hume, who became his closest friend. In 1751 Smith was elected profes￾sor of Logic and Rhetoric at the University of Glasgow, and the following year he accepted

Introduction

xiii

its Chair of Moral Philosophy. Smith’s course in moral philosophy included lectures on nat￾ural religion, ethics, jurisprudence, and political economy (the latter providing the future

foundation for The Wealth of Nations). Smith rose to the rank of vice-rector (or provost).

These thirteen years as an academic were to be the happiest and most productive of his life.

While modern readers may know of Adam Smith because of The Wealth of Nations, his

early renown during his life came from The Theory of Moral Sentiments (1759), a book that

addresses the ethical foundations of human society. The work provides the core of Smith’s

moral philosophy, and its understanding is essential for discerning some of Smith’s eco￾nomic ideas. The book sold well, leading Hume to quip that this “melancholy” news could

only mean the book must be of dubious quality! Based on the reputation of this work, Smith

was offered a position as tutor to the stepson of Lord Charles Townshend, the Duke of

Buccleuch. This afforded Smith the opportunity to travel to Europe for several years, where

he met Voltaire, Francois Quesnay, and other leaders of the Enlightenment movement.

In 1767 Smith received a life pension from the Duke and returned to his mother’s home in

Kirkcaldy. Inspired by the French reformers he had met, Smith began to develop his

Glasgow economics lectures into a book on commerce. This was a slow and painful process,

marred by melancholia, hypochondria, and a perfectionist streak that delayed publication.

When the book finally appeared in 1776 it came too late to play a decisive role in the tumul￾tuous events leading to war in the American colonies. Intellectuals greeted the book with

acclaim, but British legislators were not swayed. The Wealth of Nations did give comfort to

the colonial revolutionaries, however, as attested by the number of America’s founding

fathers who bought it for their libraries.

Smith had come to London to be closer to his publisher and to Parliament, but returned to

Scotland and entered temporary retirement. He began work on a book about the arts, and

planned another on jurisprudence. In 1778 Smith moved to Edinburgh to accept an appoint￾ment as Commissioner of Customs for Scotland. There is some irony in this as Smith—a

proponent of limited government—became a bureaucrat responsible for collecting taxes for

the state. This is less inconsistent than it might appear. Smith didn’t take the position for

power or money (he still had his large pension and he generously gave away much of what

he did make). But he knew that government must raise revenue to pay for legitimate serv￾ices. Smith was ardent in fulfilling his duties, going so far as to burn some of his wardrobe

items when he belatedly realized they had been smuggled into the country. The idealist for

free trade was an even greater proponent of duty and justice.

Smith also made time to issue revised editions of The Theory of Moral Sentiments and The

Wealth of Nations. He died July 17, 1790, leaving instructions to burn his unfinished man￾uscripts. One exception was the Essays on Philosophical Subjects, which was published

posthumously in 1795. This work contains a number of Smith’s important articles on sci￾ence, the arts, and metaphysics. It also contains a contemporaneous biography of Smith by

his friend, Dugald Stewart.

We now turn to Smith’s account of morals and their relation to markets.

The Wealth of Nations

xiv

Smith’s moral philosophy

The Theory of Moral Sentiments, Smith’s first book, is an account of how humans are

adapted by nature to live in society, and how an individual comes to develop a moral con￾science—requisite for society to function in reasonable harmony. Smith’s thesis is that nat￾ural instincts guide action, even if we are not fully conscious of them. Smith writes:

Thus self-preservation, and the propagation of the species, are the great

ends which Nature seems to have proposed in the formation of all ani￾mals…. But though we are in this manner endowed with a very strong desire

of those ends, it has not been intrusted to the slow and uncertain determi￾nations of our reason, to find out the proper means of bringing them about.

Nature has directed us to the greater part of these by original and immedi￾ate instincts. Hunger, thirst, the passion which unites the two sexes, the love

of pleasure, and the dread of pain, prompt us to apply those means for their

own sakes, and without any consideration of their tendency to those benef￾icent ends which the great Director of nature intended to produce by them.

(Oxford University Press, 1976, p. 77)

Smith identified three main instincts that spur behaviour: the instinct to promote our own

wellbeing, the instinct to promote the wellbeing of others, and the instinct to cause harm to

others. Our moral conscience passes judgment on these urges. A properly-socialised person

comes to see himself as no better than any other person; he comes to hear the rebuking voice

of an “impartial spectator” if he improperly places his own interests ahead of others. In The

Wealth of Nations Smith focuses on the virtuous aspects of properly attending to our own

instinct for self-betterment, but it would be incorrect to assume that we can ignore the other

instincts in the economic realm. This is because all the instincts serve the interests of soci￾ety. The institution of justice, for example, arises out of our instinct to seek revenge against

people who have wronged us. When the instinct for our self conflicts with the positive and

negative instincts for others, Smith’s moral sentiments model advises that we must learn self

control to adjudicate action.

To summarize, Smith felt that hidden forces called instincts were the impetus for much

human behaviour. He labels these invisible instincts the “call,” the “power” and the “pas￾sions” of nature. At various places he calls them the “invisible hand,” a topic to which we

now turn.

The invisible hand

One of Smith’s main contributions to economic theory is the concept of the invisible hand.

He borrowed the phrase from Shakespeare, Daniel Defoe, and others, but used the term

sparingly—once in Moral Sentiments, once in Wealth of Nations, and once in an earlier

essay. However, the idea behind the invisible hand appears throughout his works, namely,

that there are hidden forces at work in human society (just as gravity and electricity work

invisibly in the material world). These natural instincts, Smith posits, spur us to create order

and progress in our communities, even though we are largely unconscious of the motives