Blogging Adam Smith

Some years ago, a reader (I forget who, I’m afraid) challenged me to read Adam Smith’s The Wealth of Nations. I think the idea was to prod me toward capitalism or something. I thought it was a good idea and finally got around to it, taking notes as I read.

I will be putting this up in three installments, once per week, as I assume you web kids have short attention spans.

Week Deux
Week Three

Mark Rosenfelder, 2010

On reading old social scientists

Is this seminal work of political philosophy worth reading? Eh, you can live without it. My overall impression is that it’s about 1/3 stuff any American born since 1900 understands in their bones, about 1/3 stuff that’s wrong or outdated, and the rest so vague or glib that it’s not very impressive.

Much of this isn’t Smith’s fault— it’s the fate of any academic work long past its period of influence. You’re not going to be especially enlightened by reading Newton or Galileo today; better just read your college physics textbook. Biologists still admire Darwin, but if you read him you’ll have to make allowances for his complete ignorance of Mendelian genetics and DNA.

I’m more inclined to blame him for the near absence of quantification. Some of this is the fault of his times, of course; the data we’d like to see usually just wasn’t there. When he does have data he uses it, and I’m sure he’d be thrilled to have access to the kind of economic data that’s routine today. But all too often he’s happy to speculate instead, and the lack of precision vitiates his arguments.

And finally, I’m no economist myself, nor a historian of economics, so often I just don’t know what was new in Smith, where he’s considered wrong and why. For the most part what I do know of economics I get from modern writers.

Sometimes, just to amuse myself, I noted instances where Smith would be opposed by or would embarrass his modern defenders, especially conservatives and libertarians.

Side note: Isn't it a bit embarrassing that the chief theorist of capitalism has such a bland name? “Marx” is distinctive. What are you trying to hide, Mr. “Smith”?

Point of view disclaimer

Some folks on the right, believing their own propaganda, assume that liberals are socialists. By no means. See this page; but in brief, liberals accept capitalism and want the market to do as much as possible.

In any case, one theme of these notes is that Adam Smith's world, though it gave birth to ours, was different in significant ways. Interpreting Smith in current political terms is generally foolish. In general his intellectual opponents were mercantilists, people who wanted to obstruct free trade in favor of certain industries. Mercantilist ideas are by no means dead, but they're as likely to be right-wing as left-wing today. As we’ll see, Smith often criticized manufacturers and traders and saw their interests as often opposed to that of society at large.

Pedantic notes

I’ve tried to explain the context enough so you can follow without having read the book; but I’ve made no attempt to explain everything Smith is saying. That would be actual work and stuff.

Each note gives the page reference to my Barnes & Noble edition; even if you have a different edition this should at least show how far in the chapter the passage I’m talking about comes.

The original chapter titles are cumbersome, so I’ve simplified them.

Book I: Productivity

Ch. 1 - Division of labor

(1) There’s one bit of Smith which is widely repeated: his account of the pin factory, and how much more efficient a modern factory with highly subdivided labor is than a single craftsman. (He estimates the actual rates as 4800 pins per person per day versus 20 or 1.) What’s amusing is where this example comes: page 1. Though it’s a great story, one suspects that many readers gave up soon after.

(7) Workmen are liable to create machines to simplify their labor: Maybe in the first fifty years. After that, experts do most of the inventing. How many Chinese factory workers or Wal-Mart stackers invent new machines to simplify their little bit of work?

(9) “Observe the accommodation of the most common artificer or day-labourer in a civilized and thriving country, and you will perceive that the number of people whose industry a part, though a small part, has been employed in procuring him this accommodation, exceeds all computation.” The whole tenor of this passage would, or should, outrage an Ayn Rand. Smith certainly didn’t take the view that the important agents of capitalism were CEOs or even inventors.

Ch. 3 Division of labor and size of market

(16) Here’s a nice quantification of the difference between the capacity of land and sea transport. A single wagon could bring about 4 tons of goods from London to Edinburgh in 3 weeks. A ship in the same time could carry 200 tons.

Ch. 4 - Money

(22) Smith mentions the difficulty of assaying metals in ancient times, but doesn’t seem to realize that the necessary solvents were not yet known.

Ch. 5 - Price

(28) “Gold and silver, like every other commodity, vary in their value, are sometimes cheaper, and sometimes dearer, sometimes of easier and sometimes of more difficult purchase.” Throughout this passage Smith makes it clear that gold and silver are commodities like any other, simply more convenient for exchange than other goods. He’s arguing against the notion that gold and silver are somehow special, the natural and eternal measure of value. Many a modern conservative still hasn’t got the message.

(30) Smith figures that “corn” (i.e. wheat) is about the best measure of labor productivity over time and space. He’s searching for a way to discount inflation and fluctuations in the value of precious metals, hoping to find the “real value” of labor and other things. I suspect he’s after a chimera— that this “real value” doesn’t exist. Values are only defined in terms of other things; there is no absolute any more than there’s an absolute physical frame of reference.

He may be right to talk about the “subsistence of the labourer”— we’d probably talk about the “cost of living”. But I don’t think time has been kind to the notion that grain is a reasonable approximation to this. Among other things, there’s the vast differential in agricultural productivity. Very little in the American economy could be usefully explained in terms of the price of bread.

Ch. 6 - Components of price

(39) The basic idea of capitalism— though curiously Smith calls capital “stock”. The capitalist uses his capital to get work going and his profits constitute his wages; Smith points out that these can’t be considered wages for management (“inspection and direction”) since they are in proportion to the capital, not to the supposed work of management.

(41) And here’s the original sin of economics... Smith divides the price of corn into rent, wages, and profits; nothing about externalities.

Ch. 7 - Natural vs. market price

(45) Smith defines the price just sufficient to pay rent, wages, and profits the “natural price” of a commodity, which he distinguishes from the market price. I think this “natural price” of his is a chimera. People easily assume there’s such a thing, but it has no existence apart from market prices— you can never find or measure it.

(46) Way to fail to understand a supply-demand curve, bro. He explains that prices rise when supply fails to meet demand, and lower when supply exceeds demand, but seems to think that “effectual demand” is a particular number, that suited to the “natural price”. Picturing the supply and demand curves is a much more effective way of thinking about this.

(49) Sometimes a surge in demand raises the market price and suppliers keep the fact secret, lest other suppliers enter the market. The closest he comes to an example is a case where the market is at a great distance from the suppliers... a glimpse back into a world of slow communications and thus very inefficient markets.

(50) A more straightforward discussion of “secrets in manufactures”. He considers applying the extra money to wages but applies it to profits instead... perhaps inconsistently as he’s already allowed the idea of skill to labor. Still, I think he’s missing the notion of productivity.

(50) Some products, like French wines, require “such a singularity of soil and situation”, that prices may be raised for centuries. By Smith’s account the difference goes to rent rather than wages or profits. Again, I think the idea of a “natural price” is getting him in trouble.

(51) “The monopolists, by keeping the market constantly understocked... sell their commodities much above the natural price... The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken....” Maybe it’s the libertarians who need to read Smith; I’ve heard them denying that monopolies exist, or that they raise prices.

Ch. 8 - Wages of labor

(56) “We rarely hear, it has been said, of the combinations of masters [cartels]; though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour....” Another passage skipped over by the libertarians, I think.

(59) A passage comparing England and British North America, where we learn that England is “much richer”, but wages in BNA are much higher. He doesn’t offer much of an explanation, except that wages are tied not to national wealth but to “its continual increase”— i.e. wages are high in BNA because it is rapidly growing richer, rather than (as in the home country) slowly growing richer. But isn’t that just a tautology? And again, he doesn’t seem to come close to the idea of productivity.

(60) A comparison with China shows, I think, that what he has in mind is that high wages correlate with underpopulation. China is about as cultivated as it can get, so its wealth is static, and there can be no scarcity of workers. And what if the Chinese adopted the division of labor that he talked about back in ch. 1? He does talk about factories and crafts, but my impression is that his mind still thinks of national wealth in terms of agriculture.

(63) Smith notes but doesn’t really explain that wages in London are more than twice that in the countryside; he wonders that poor people don’t flock to London. I’d say either they’re being compensated for something, or (more likely) labor is costly because there’s so much more enterprise that needs it. Jane Jacobs would probably comment that Smith would have done well to concentrate on the wealth of cities, not that of nations...

(66) “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” That could be a slogan for liberalism.

(67) “Luxury in the fair sex, while it inflames perhaps the passion for enjoyment, seems always to weaken, and frequently to destroy altogether, the powers of generation.” That is, poor women may have 20 children where a rich one may have no more than 3. There’s a curious whiff of moralism or class panic here. But he goes on to note that 18 of the poor Highlander’s children will die before maturity. The economist fails to think economically: having fewer children is one of the luxuries the rich can afford.

(68) Interesting: Smith argues that free men, even in BNA, cost less than slaves, because poor but free men are more frugal than overseers.

(69) “The liberal reward of labour, as it encourage the propagation, so it increases the industry of the common people... Where wages are high, accordingly, we shall always find the workmen more active, diligent, and expeditious....” So, it’s better to pay high wages. Conservatives please take note.

(71) This whole section, indeed, is an attempt to convince the elite that a high-wage economy is good for them! Here he explicitly refers to masters preferring ”cheap years”, i.e. recessions. Apparently the conservatives of 1776 were disturbed by the country getting too rich!

Ch. 9 - Profit

(77) Smith notes that interest rates, as a rough measure of profits, are lower in more advanced countries: 10% in the time of Henry VIII, 3.5% in his time in England, 5% in Scotland and France, 3% in Holland (which he considers richer than England), 12% in China. I doubt this correlation exists today: modern economies can be all over the map.

(78) However, British North America had high interest rates too, 6 to 8%. Smith thinks that colonies are a special case; he talks about the ease of acquiring good land, not quite saying that profits are high because you can steal nearly free land from the Indians.

(80) A strange passage where Smith blames the “increase in territory and trade” from the Seven Years War for the rise in interest rates. This seems wrong; the territory in question was Canada, then amounting to about 50,000 people. and its effect on England’s wealth could only have been remote and potential. The effect of the cost of the war is another story.

Ch. 10 - Differences between industries

(91) A bizarre argument that only 5% of aspiring lawyers will make a living by it, and thus the 5% should make “all that should have been gained” by the unsuccessful. Huh? His analogy is with a lottery, but the logic seems weak, and he himself notes that his prediction isn’t borne out. I don’t see why unsuccessful lawyers can boost the wages of the successful; once they quit the law they’re not lawyers any more and their existence can’t have any effect on the profession.

(92) Smith thinks that actors and opera singers are paid well to compensate them for the ill repute of their profession, and that if this ill repute changed their pay would drop. Got that wrong, pal.

(93) “The neglect of insurance upon shipping... is, in most cases, the effect of no such nice calculation, but of mere thoughtless rashness and presumptuous contempt of the risk.” Smith understands insurance better than many modern people, who seem to think there’s something shady about the concept.

(94) Smith notes that going into the navy was respectable— barely— but going into the army was definitely not. This is a combination of the mores of the times and of Britain, I suspect.

(97) He explains that much of the apparent profits of a small grocer (40-50%, as compared to 8-10% in wholesale trade) may really be wages. A reasonable point, but he doesn’t really provide a principled way of dividing out what are an owner’s wages vs. his “real profit”.

(102) Interesting regional difference: in London it was customary to rent an entire house; in France or Edinburgh you could rent just a single storey.

(106) Discussion of apprenticeships. Smith is dubious about the whole concept— since they’re not paid by the piece, they tend to be idle; and most trades don’t take that long to learn anyway. He points out that the institution is best explained as restraint of trade: masters and craftsmen profit, the country suffers, by restricting employment.

(108) A view of town-countryside relations that seems quaint and, if Jane Jacobs is correct, wrong even for Smith’s time. Smith doesn’t even mention inter-town trade, and a world where 98% of the economy is urban would seem alien to him. (On the other hand he understands that towns are much better generators of wealth than the countryside.)

(110) No craft trade is as complex or requires as much contingent local knowledge as farming... yet it wasn’t seen as requiring education. Because of this Smith supposes that the “natural wages” of farming should be higher, if it weren’t for the craftsmen’s restraint of trade. I’m not sure about that— in his time farmers were in oversupply, and this would be exacerbated not eliminated if city wages were reduced. A better conclusion would be that the market doesn’t care about schooling per se, only about schooling that restricts the supply of labor. Society doesn’t reward a medical degree because it’s impressed with your effort, but because degrees restrict the supply of doctors.

(112) “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” A rare aphorism— Smith is rarely witty— and one libertarians would do well to ponder.

(115) Law and medicine are respectable and well-paid precisely because the supply is kept low; thanks to public institutions intended to produce clergy, there’s a huge oversupply in the liberal arts, and teachers are “indigent”. It’s not so different in the Third World today: there’s a lot more educated people than jobs. What Smith couldn’t foresee was a huge increase in the sort of jobs that require a college education.

(118) Interesting discussion of the old system that discouraged the migration of labor. It’s really a case study in unintended consequences: the idea was to have parishes provide for their poor. Only they had to be protected from providing for other parishes’ poor; thus the idea that you had to have a “settlement”, basically the right to live in a parish. This was almost impossible to get, and ultimately was responsible for the very unequal wages across Britain.

Week 2

Ch. 11 - Rent of land

(128) It looks like people have always prophesied ruin due to reform. In the 1730s it seems some regions near London protested against building good roads to other parts of the kingdom, on the grounds that London would be swamped by cheap goods from low-wage areas. (P.S. The roads were built and profits increased instead.)

(129) In the “rude beginnings” of agriculture, beef is cheap and grain expensive. In support Smith cites Argentina— a colony, not a primeval settlement.

(129) More on how landlords may choose to grow grain or cattle. On the plus side, there’s a recognition of what we’d call opportunity costs. On the negative side, Smith treats the decision as motivated entirely by possible profits— it seems to be assumed that land can be used with equal efficiency for either.

(135) A discussion of the various other uses of land, which Smith thinks are “regulated by the rent and profit of those common crops” (meaning grain and pasture). A strange formulation, unless we take it as a way of talking about opportunity costs— you could say that no unusual business can thrive unless it does better than using the same resources in the ordinary business of the country. So if everyone is growing olives, you’d better have a good reason if you propose to grow turnips instead.

(138) Tobacco is more profitable than corn in Maryland and Virginia, and the growers naturally seek to restrict tobacco cultivation. Smith thinks that this shows that the extra profit is due to such conspiracies. Again, the fundamental weakness of the book is the failure to quantify. Suppose tobacco is 50% more profitable. Some of that may be due to restraint of trade— but how much? You can’t just assume it’s the whole 50%. What if it’s just 20%?

(140) Here’s a factoid for you: Smith thinks that when the poor are mostly fed by oatmeal, as in his native Scotland, they’re poorer workers and frankly uglier; while the Irish, raised on potatoes, are stronger and better looking.

(152) “Food not only constitutes the principal part of the riches of the world, but it is the abundance of food which gives the principal part of their value to many other sorts of riches.” Adam, you’re so 18C.

(154) Smith treats precious metals, in this case silver, as a commodity whose price derives from its supply. This is still news to many conservatives.

(161) He notes that chickens in Britain were fed from “offals of the barn and stables”— that is, they scrounged from what would otherwise be just waste, and thus were nearly free to raise. But he considers that it’s valued as meat for its rarity, thus accounting for chicken being more expensive in Britain than in France where grain was raised to feed chickens. Something seems dubious about the logic— if chickens were more profitable in Britain their cultivation would be encouraged, no?

(163) A discussion of milk reveals the transformation wrought by the refrigerator: milk scarcely lasted a day. Fresh butter lasted a week; salt butter, a year; cheese could last several years.

(177) “Neither wind nor water mills of any kind were known in England so early as the beginning of the sixteenth century, nor, as far as I know, in any other part of Europe north of the Alps.” Quite wrong, as Jean Gimpel shows. The Domesday Book itemized 5624 water mills.

(178) “Every improvement in the circumstances of the society tends either directly or indirectly to raise the real rent of land...” Though the price of land probably does go up, surely the implied proportion of rent in the economy of a nation is false? It’d be interesting to know what percentage of all companies’ expenses are rent; its surely not high, especially given that it’s more common these days for individuals and firms to own their own premises.

(180) The concluding pages of the chapter are perhaps the most surprising so far— it’s an argument against the capitalist class and a warning to distrust their political demands, based solely on class interest. The great landowners are the most to be trusted, because their prosperity correlates with that of the whole nation. The workers are mostly just along for the ride— they rise or fall with the nation’s prosperity but are “little heard and less regarded” in politics. But the capitalists are least tied to the interest of the society at large— indeed, their rate of profit declines as the country advances. And what they frequently want is to restrict competition, which is bad for everyone else. Yet they’re better informed about their own interests and thus have great influence— which they use to “deceive and even to oppress the public”.

Book II: Capital

Ch. 1 - Types of capital

(192) To Smith money is only one type of “stock” (capital), along with merchandise, raw materials, and even the expertise of workers; Smith might be surprised to see the whole system named after it. Nonetheless it’s the strangest and most morally difficult bit. Intuitively, I think we expect that a pile of money shouldn’t of itself generate more, and that leads to a feeling that the man with that pile is getting a freakish and undeserved benefit, like a man who happens to own a gifted jumping frog.

If you happen to be the man with the pile of money, it’s only human to think that you, and not the money, are doing useful work. And to some extent you are, but with less repeatable skill than your assembly line workers. You’re really just a lucky guy with a frog.

(194) In lawless and violent societies— of the sort that radical libertarians aspire to— people don’t use all their money, but hide a substantial fraction of it, to the point that there were laws on who owned unclaimed treasure troves. (The king did, though one imagines that the finder had zero motivation to inform him.)

Ch. 2 - Money

(201) Money is not revenue. Again, this must be a disappointment to the gold bugs.

(202) Smith explains the magic of reserve banking— a banker can have $20,000 in gold and lend out $100,000— and then immediately messes up. He posits that a country has a million pounds in circulation, but bankers multiply this to L1.8 million. The country only needs a million pounds, though, so the rest goes abroad.

Huh? Who says the million pounds circulating are some sort of mathematical constant? The people who use that created money— i.e. borrowers— use it to start businesses, buy equipment, hire workers, build houses. The economy of the nation increases. Some of it will go abroad, but most of it won’t.

(203) He goes on to say that the money shipped abroad may purchase new materials and tools, or useless frivolities like wine and silk, which is “in every respect hurtful to the society”. An unexpected dash of moralism from Mr. Invisible Hand. Also hard to take seriously in an age when, frankly, some of our biggest businesses are popular crap. A capitalist economy grows precisely because it doesn’t limit itself to wheat and nails.

(204) Finally he reassures himself that the spending on luxuries will not after all be too great. Once again the lack of quantification vitiates the argument.

(206) Banks are so familiar to us that they seem eternal, but Smith recounts how they were introduced to Scotland within the previous century, resulting in a huge increase in the economy.

(208) More on the vagaries of early banking: it seems that in Scotland, businesses could draw on an interest-bearing bank account; while in England they must keep gold on hand. As this subtracted a considerable sum from the banks, a London firm with the same capitalization as a Scottish one did less trade and hired fewer workers.

(216) Smith soberly advises that banks shouldn’t lend to “traders” nor those who need “fixed capital”, e.g. to start a mine. His grounds are that repayment may not take place for many years, far past the patience level of bankers. An odd scruple, and one that banks very quickly got over— investment nearly from scratch is the foundation of our economy.

(219) “Where paper money, it is to be observed, is pretty much confined to the circulation between dealers and dealers, as at London, there is always plenty of gold and silver.” A linguistic note: it’s somehow surprising that the idiom “pretty much” is this old— it still sounds colloquial and not at all academic.

(220) “But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments.” Or to put it in 21C terms, libertarians are wrong; liberties can be restricted for the common good.

(222) A discussion of fiat paper currencies, popular in North America, which Smith dismisses as inflationary. The trouble, however, came not because the currencies were unbacked, but because of the terms of the backing: they could be exchanged for metal only after several years. They thus amounted to a loan to the government at zero interest, understandably disliked when prevailing interest rates were 6%.

Americans can hardly reject such things entirely, as the Revolutionay War was paid for by just such fiat currency.

There’s undoubtedly something disconcerting about modern currencies which are backed simply by a cultural value; but Smith and others are forgetting his own lesson that gold and silver, too, are just commodities which are used as currency for pure convenience. If you have a large and stable enough country that default is vanishingly unlikely, like the US, fiat currency works.

(225) “In general, if any branch of trade, or any division of labor, be advantageous to the public, the freer and more general the competition, it will always be the more so.” This after a more particular statement that competition makes banks “more liberal” to their customers. Basically, competition is good.

What surprises me is how ardent capitalists agree with this in theory, but end up defending monopolies. I’ve seen libertarians denying that monopolies have any bad effect on the market. That’s the problem with fetishizing any part of a system, such as the liberty of the entrepreneur. A system works by balancing its parts. If we take Smith’s warning seriously, we should worry when any one firm dominates the market, for whatever reason. Its liberty is not sacrosanct. The public good will be better served by more competitors.

Ch. 3 - Accumulation of capital

(228) A discussion of “unproductive labor”— such things as servants and going to the theater. I suspect these looked a lot more marginal in 1776 than today, when manufacturing is just 12% of the economy. The distinction originates in moralism and breaks down as capitalism develops. New needs are developed and providers arise to supply them.

For that matter, if the process ever stops, we’re screwed. The whole reason automation doesn’t impoverish our society is that as one set of jobs is replaced, a new set is created.

(231) The people of manufacturing towns are industrious and sober; those of court towns are idle, dissolute, and poor. Interesting, but hard to modernize. My stab at it: the difference is in whether jobs reward greater effort. You can make more money if you make 4800 pins a day rather than 4000. You can’t make more money by valetting or dusting more assiduously.

(238) England was clearly getting more wealthy over the centuries; yet there were always people direly proclaiming that its wealth, industry, and population were all declining. This was undoubtedly partly a function of the near-impossibility of getting good statistics, but also to the fact that to the conservative mindset, the world is always going to hell.

(240) Complaints about “the profusion of government” and how England has never had a “parsimonous government”. Sounds libertarian, but it leads into an argument against the hypocrisy of sumptuary laws. That is, it’s really an assertion of the modern vs. the medieval mindset. The merchants and manufacturers, not the kings and nobles, are now the standard class.

(241) Spending on durable vs. consumable goods: a rich man who spends his pile on servants, dogs, and fine food will look richer but end up poorer than one who spends on improving his estate or even collecting objets d’art. Undeniable, but I wonder how important this really is. Our economy relies mostly on consumer spending; it hardly matters if people buy arugula and comic books rather than houses and stocks. In some sense we’d rather you buy crap and lots of it! But really Smith is writing in a time when investment was almost entirely in the hands of individual capitalists, not huge banks. So it mattered a lot more what Rich Guy #672 did.

Ch. 5 - Employment of capital

(256) The most advantageous use of capital is for agriculture, since (in effect) nature does most of the work in multiplying capital. Completely quaint today when agriculture is a tiny sector of the economy. But even in 1776, wasn’t it evident that all civilized countries have agriculture, but only the most prosperous had effective manufacturing and trading sectors?

(258) A bit of advice to our North American colonies: keep focusing on agriculture, the source of your rapid growth; it would “obstruct... the progress of their country toward real wealth” to attempt to develop manufacturing or a merchant marine. A spectacular mistake, and one compounded by Ricardo: backward countries should just learn to enjoy their backwardness, it’s the best they can do.

(266) But here he notes that many great fortunes have been derived in Europe from trade and manufacturing, none from agriculture. This is pretty much contradictory to his earlier advice to the North Americans.

Again I suspect the key is quantification. Perhaps the gains from agriculture were, as Smith says, the highest. But it wasn’t multiplicative. You improve agriculture to a point, and you run out of land to put under cultivation or improvements to make. Trade and manufacturing can keep building for centuries, as they keep finding new things to do and make.

Book III: Differences by nation

Ch. 1 - Natural progress of wealth

(270) “The cultivation and improvement of the country [must] be prior to the increase of the town.” Smith needs to read Jacobs... or see a city-state in action. It’s still widely felt today that somehow wealth derives from rural areas. But nations that stay rural, however rich their resources, are backwaters that end up taken over by empires or indirectly managed by mercantile states.

(272) Back to America, where every man of ambition became a farmer.... including craftsmen, who prefer it to going into manufacturing on a larger scale. The mistake here, I think, is to imagine that America was a primitive economy. It was really an enormous gift of nearly-free land. Of course the incentive structure changes when you can acquire a huge bit of capital— namely a big parcel of land— for free.

Book IV: Political economy

Ch. 1 - Mercantilism

(278) More mockery of those who think money— gold and silver coins— is the measure of wealth. He points out that the Spanish used to ask if a country had gold, to see if it was worth conquering. Plundering this gold, historically, did not make Spain a rich country. Amusingly, he relates that the Mongols asked a French envoy if there was much sheep and oxen in France; they were making the same inquiry by their standards.

(284) The great advantage of gold is its compactness: you could store 5 million guineas of gold in one boat, whereas it would take a thousand boats to store its value in wheat.

(285) Government actions to stabilize the supply of gold and silver are foolish... a lack of these is no real impediment to the economy.

(285) In situations where people complain of a lack of silver and gold, “Over-trading is the common cause of it.” But what he goes on to describe is a credit crunch: entrepreneurs are out of cash and no one will lend to them; those who do have gold don’t find anything to spend it on.

(It may be that the crunch occurs from traders in a hot market being incautious in their spending, as he describes... in our terms this is a little overheated market followed by a recession.)

(293) On American-European contact: “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.” If the poor boy said this today he would be taken as a dangerous leftist— one of those anti-colonialists Newt Gingrich warns about.

Ch. 2 - Import restrictions

(300) “[An individual] 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.” The first occurence, so far as I can see, of this famous phrase.

(301) “What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.” A terrible principle, as some economic policies are quite non-intuitive. A relevant one today is the paradox of thrift: if everyone tries to save money and not spend, then the economy crashes.

(302) Here’s the basic argument that laws favoring a type of manufacture are bad, even if without them that manufacture would not exist. Smith maintains that, left to their own devices, people will spend their money more productively.

He needs to read Chang. Maybe a nation should stick to what it’s good at... but if it’s only good at menial labor, it will never advance. 18C England is not a guide to what such nations should do. If you want to become good at more lucrative stuff, you may need to take special actions, including tariffs and directed development.

Obviously protecting industries can be abused. But there are precious few examples of countries which developed without ever doing it.

(307) Here Smith actually offers a justification for protecting an industry: national security. Measures against the Dutch carrying trade helped prevent Holland from becoming a naval power that could endanger England.

(313) Manufacturing leads to “application and industry”, soldiering to “idleness and dissipation”. A telling comment on contemporary attitudes toward the army.

Ch. 3 - Restraints on imports

(316) Animosity and the spirit of national monopoly prevented free trade between England and France. But “If the wines of France are better and cheaper than those of Portugal, or its linens than those of Germany, if would be more advantageous for Great Britain to purchase both the wine and the foreign linen which it had occasion for of France, than of Portugal and Germany.” The basic free trade argument... even if we’re sending money abroad, we’re saving money. A linguistic side note: look at that stranded preposition. To Smith too, rules mandating prepositions before their objects were something up with which he would not put.

Ch. 4 - Bounties

(337) England subsidized the export of wheat. Smith thinks this is at the expense of the English, since “every bushel of corn which is exported... would have remained in the home market to increase the consumption”. But that doesn’t follow, if the bounty increased production.

He’s right, though, to note that the taxation which provides the subsidy is essentially a redistribution from the public to the wheat industry.

(339) He goes on to argue that the bounty raises all prices, which goes back to his notion that the value of wheat somehow regulates all other prices. I’m not convinced. Think about a narrower redistribution: we give the value of the total bounty to Lord Wimsey. Is there any doubt that Lord Wimsey is better off? Maybe he blows it on incunabula and the nation is a loser by the transaction; or maybe he makes a key investment and the public benefits.

(344) Pages later, he’s still ranting about the wheat bounty. Again I think he’s overestimating the centrality of wheat. It’s still a $60 billion business today, if I haven’t slipped a zero somewhere; but that’s a miniscule fraction of a multitrillion-dollar world economy. A wheat subsidy today, whether ill-advised or not, would affect only a fraction of the economy. The fraction may have been much larger in 1776, but it was still a fraction.

Ch. 5 - Colonies

(360) The most “ruinous” of all projects leading to bankruptcy is the search for gold and silver. This in a discussion of Spain’s thirst for precious metals. The immediate impact on Spain was a sudden ability to pay for a large standing army, which allowed it to dominate European wars for a time but ultimately came to little. The long-term impact was to keep Spain as a second-rate country.

Fine; but California’s gold rush seems like a counter-example. Maybe the specific fortunes of gold hunters were as Smith says; but on the whole, the gold rush led to quick development of California, and the resulting push to grab and settle the states in between.

Ch. 6 - That’s it for mercantilism

(365) “It is the industry which is carried on for the benefit of the rich and 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.” If a Democrat said this he’d be accused of “class warfare”.

(367) Smith refers to several bounties encouraging imports from America, made on the principle that the colonies were part of Great Britain. He calls this “folly”, apparently referring to the political troubles with the colonies. In any case the lesson, interestingly, is anti-imperialist. Colonies are separate countries.

(375) Smith reviews various prohibitions on exportation. He must have won this argument, because such things sound ridiculous today. How can you benefit the economy by restricting exports? But mercantilists had all sorts of reasons for it.

Book V: State revenues

Ch. 1 - State expenses

(404) A standing army can never be “dangerous to liberty” if it’s formed from the nobility— that is, those who already have authority in the country. But this only works if landowners are the standard class, whose interests are presumed to be identical to those of the nation. By the time of the Crimean war it became clear that aristocrats were no longer the natural officers of a modern army.

(405) He finds firearms to be highly expensive, requiring large standing armies and expensive fortifications. I suspect he’s wrong— medieval warfare wasn’t cheap. Good arms and armor were a luxury only the nobility could afford, and even small armies were extraordinarily destructive, as they tended to turn into freebooters when the war was over. Proportionately the cost to society was higher... indeed, earlier in the book he shows that the last big war, the Seven Years War, did little to retard the progress of the British economy. You could hardly say the same for the Hundred Years’ War.

(410) A toll on the carriages of the rich is a “very easy” way of helping the poor (as good roads benefit consumers). No hint, then, that Smith disapproved of at least some taxes aimed at helping the poor.

(411) Ah, but here he turns into a raging consie. “Were the streets of London to be lighted and paved at the expense of the treasury, is there any probability that they would be so well lighted and paved as they are at present, or even at so low an expense?” Er, well, why not? Roads and policing are pretty efficiently conducted as a mixture of local, state, and federal expenditure here.

He talks about taxation at the level of the individual street for these things; but though an Edinburgher may not much benefit from paving London, all of London does benefit if a particular street is paved. Goods in general move faster, and you never know where in the city your business will take you. And for that matter the savings to London businesses benefit other towns in England, and tourists or businesssmen visiting the city. And that’s not getting into infrastructure work spread over the country, or economies of scale.

And though it might not have bothered Smith if some streets couldn’t afford paving, such market failures can compound, retarding not only those affected but the whole economy. Unpaved roads would have discouraged services— effectively taxing those who could least afford it— and unlit streets invited crime. And poor people, you know, are unsatisfactory consumers.

(412) Smith reports that the custom of maintaining ambassadors abroad was originally to benefit commerce. Using them for actual inter-governmental contacts apparently came later.

(414) He argues against perpetual monopolies— for trading companies, inventors, authors. So far so good, but didn’t he think that private tolls were fair and efficient?

(415) Smith thinks joint-stock companies are good at only a few, very limited things; he names banks, insurance, canals, and water supply. What these have in common is a reliance on routine... he doesn’t think corporations can handle varying conditions and uncertain situations.

Everyone has a right to some big boners, but this is a pretty amazing one. The theorist of capitalism thinks that the corporation has no great future. (But arguably the thing he really missed, the invention that made the modern corporation possible, was the telegraph.)

(420) He somewhat reluctantly endorses government-paid education as beneficial to the nation, but would prefer that schools be supported by the students. In this section generally Smith takes too narrow a view of who benefits from public works, and how easily the benefitters can be made the sole payers. It benefits a student to get an education; but it also benefits his unknown future employer. Why should the employer get a free ride? The problem of externalities is far trickier than Smith acknowledges.

Ch. 2 - State revenues

(423) An amusing complaint about the government of England— “slothful and negligent” in peace, prone to “thoughtless extravagance” in war.

(431) He describes the “vexation” of examination by tax authorities as a currency equivalent. A neat idea but not carried through. It might be a fascinating experiment to monetize vexation of all kinds. I imagine a huge amount of it would be between individuals, or between them and corporations.

(442) “It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.” Well yay, a weak endorsement of progressive taxation.

(452) “A tax... proportioned to the trade of the dealer, is finally paid by the consumer.” Reasonable in theory, but it depends. A producer might choose to reduce his profits somewhat.

Something similar to a tax is the charge that credit card companies take on credit purchases; generally the merchant doesn’t or isn’t even allowed to pass this on to consumers. He loses in an obvious way from the charge, but benefits in a very hard-to-quantify way from the increased convenience to his consumers.

It’s sometimes said that the employer’s portion of Social Security taxes is really paid by the worker, since without them the employer could pay the worker more. Is it really believed that if this tax were eliminated, wages would rise? Why wouldn’t the employer just pocket the windfall?

And again, employers get an indirect benefit, in that they’re not obligated to pay pensions— and for that matter, because their employees don’t have to be compensated for having to support elderly parents. Again, it’s just a morass to try to calculate who gains from government payments, and looking at just the immediate costs is certainly not enough.

(458) Another curious argument against taxation (this time on property transfers): the sovereign is just going to spend the money on “unproductive labour”. I think he’s thinking of George III spending the money on servants. What if it’s the government that’s investing in the economy and the wealthy who are spending on fripperies?

(466) Smith wants to distinguish necessities from luxuries, but immediately runs into cultural differences. Wearing leather shoes was universal even among the poor in England; in Scotland poor women might go around barefoot; in France the lowest ranks of either sex might go barefoot. He presses on, but such difficulties to me render the distinction pretty artificial. Beer and ale, for instance, he classifies as luxuries— forgetting that it may be a rare thing for premodern city dwellers to have water that won’t make them sick.

(467) A weird passage in which Smith argues that taxes on luxuries don’t much hurt the “sober and industrious” poor, who don’t need them anyway. The “disorderly” poor, on the other hand, are of little use to industry and don’t raise up many children either. He’s more or less complaining that that “disorderly” poor don’t have enough children... the reverse of consies’ complaints today.

(470) He thinks taxing the necessities is “ruinous”, as it raises the price of labor. Maybe true, though the necessity/luxury divide is much less clear today than it was to Smith.

(475) “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.” An early statement of the Laffer Curve... and similarly as devoid of quantification or any means of determining whether we are in fact in such a state.

(478) “The whole consumption of the inferior ranks of people... is in every country much greater” than those of “middling rank” or higher. True only for a premodern state.

He goes on to claim that taxes are therefore most productive if they fall upon the population at large rather than on the rich. Again, hardly true today, given the huge proportion of national income taken by the rich. Our economy is much more vertiginous than Smith could conceive of.

Ch. 3 - Public debt

(497) “Commerce and manufactures, in short, can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government.” More trouble for libertarians.

(505) A long complaint about public debt which could be put in the WSJ today. Debt has ruined the Italian republics, Spain, France, and the Netherlands; Britain must not go down the same path yadda yadda. We are always on the brink of ruin, and yet somehow our prosperity keeps rising. The real conclusion should be one that Smith himself makes in other areas: the conventional wisdom, especially the whining of some privileged class, is often wrong.

(506) Amid all the warnings, Smith notes that despite the huge expense of the Seven Years War, the most expensive Britain had yet experienced, its agriculture, industry, and commerce were flourishing as never before. And since the war prosperity has only increased the more— “Great Britain seems to support with ease a burden which, half a century ago, nobody believed her capable of supporting.” Then he goes back to warnings; but he might more aptly conclude that nations may prosper even with a surprisingly large debt load.

It might also be pointed out that the effect of the war was precisely Britain’s domination of the oceans, which would last for a century during which British finance dominated the world. And that was despite a huge amount of the gains from the war being lost with the independence of the USA. Is that the mark of a nation on the danger point?

What’s not there

Finally, some notes on what’s not in the book:
  • The business cycle
  • Externalities
  • Management, especially managers as the leading class
  • Third world development
  • Cities (cf. Jacobs)
  • Investment banking and venture capital (to Smith, banks were small)
  • Market failure
Again, I don’t blame Smith for not seeing how capitalism would develop. Not many people are good at predicting the medium future, much less that 200 years away. I point out all this stuff because it was notable to me as I read, and because I detect a bit of Adam-Smith-worship in some quarters.

His contribution

The title of the book may be ironic. It’s mercantilism, not capitalism, that most focuses on “the wealth of nations”... a manufacturers’ lobby, or a consortium of traders, or the sovereign, worries terribly about the health of this or that national industry, and tries to protect it and promote it with special laws and exclusions.

Smith talks instead about the wealth of individuals. The vast mass of people, plodding along looking after their own interest, will do best if they can make their own decisions on how to pursue wealth. Attempts to direct the flow of money, to protect English wool or keep gold and silver in the country, were counter-productive. Manufacturers’ consortia should be broken up, government bounties and exclusions removed.

We still worry about things like the GNP of Great Britain or the balance of trade of the US. Most of this is probably completely misplaced. The real question we should be asking is, which class benefits from a particular situation. A tax or tariff, a monopoly, or a pricing cartel has winners and losers, and we should find out who they are, rather than worrying so much about whether “the nation” benefits or not... especially because the winners’ propaganda will always claim that the thing benefits the nation.

At the same time, we have to remember how immensely the world has changed in 234 years. Smith can help us avoid errors like putting a Moscow commisariat in charge of consumer goods. But he’s not much of a guide to modern corporations, a service economy, worldwide development, recessions, monetary policy, or ecological disaster.