The Wealth of Nations
by Adam Smith
The original, squashed down to read in about 35 minutes
Adam Smith on a Scottish £50 note of the Clydesdale Bank
Before 'The Wealth of Nations', money came and money went, lands prospered or failed and no-one really had the faintest idea why. Adam Smith brought some science to the matter. He wasn't the first to realise that the only thing in the world which costs money is labour (everything else being provided free of charge) but he was among the first to realise that money is not wealth, to explain how the division of labour actually creates wealth and to see that money is a commodity and behaves just like any other commodity - if it is scarce it becomes more valuable, if it gets commonplace, it goes cheap. His theories invented economics, and even if it still doesn't work perfectly it has given us a more prosperous and much more stable society than the mere guesswork that went before.
The Wealth of Nations
OF THE CAUSES OF IMPROVEMENT IN THE PRODUCTIVE POWERS OF LABOUR
The division of labour has been the chief cause of improvement in the productiveness of labour. For instance. the making of a single pin involves eighteen separate operations, which are entrusted to eighteen separate workmen; and the result is, that whereas one man working alone could make perhaps only twenty pins in a day. several men working together, on the principle of division of labour, can make several thousands of pins per man in one day. Division of labour, in a highly developed state of society, is carried into almost every practical art: and its great benefits depend upon the increase of dexterity in each workman, upon the saving of time otherwise lost in passing from one kind of work to another and. finally, upon the use of many labour-saving machines.
This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom which foresees and intends the opulence to which it gives rise; it is rather the gradual result of the propensity in human nature to barter and exchange one thing for another. The power of exchanging their respective produce makes it possible for one man to produce only bread, and for another to produce only clothing.
The extent to which the division of labour can be carried is, therefore, limited by the extent of the market. There are some sorts of industry, even of the lowest kind, which can be carried on nowhere but in a great town- a porter, for example, cannot find employment and subsistence in a village. In the highlands of Scotland every farmer must be butcher, baker and brewer for his own family.
As water-carriage opens a more extensive market to every kind of industry than is afforded by land-carriage, it is on the sea-coast, and on the banks of navigable rivers, that industry begins to subdivide and improve itself, and it is not till long afterwards that these improvements extend to the inland parts. It was thus that the earliest civilized nations were grouped round the coasts of the Mediterranean Sea, and the extent arid easiness of its inland navigation was probably the chief cause of the early improvement of Egypt.
As soon as the division of labour is well established, every man becomes in some measure a merchant and the society becomes a commercial society, and the continual process of exchange leads inevitably to the origin of money. In the absence of money, or a general medium of exchange. society would be restricted to the cumbersome method of barter. Every man. therefore, would early endeavour to keep by him, besides the produce of his own industry, a certain quantity of some commodity such as other people will be likely to take in exchange for the produce of their particular industries.
Cattle, for example, have been widely used for this purpose in primitive societies, and Homer speaks of a suit of armour costing a hundred oxen.
But the durability of metals, as well as the facility with which they can be subdivided, has led to their employment, in all countries, as the means of exchange: and in order to obviate the necessity of weighing portions of the metals at every purchase, as well as to prevent fraud, it has been found necessary to affix a public stamp upon certain quantities of the metals commonly used to purchase goods. The value of commodities thus comes to be expressed in terms of coinage.
But labour is the real measure of the exchangeable value of all commodities: the value of any commodity to the person who possesses it is equal to the quantity of labour which it enables him to purchase or to command. What is bought with money or with goods is purchased by labour as much as what we require by the toil of our own body. Labour alone, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times, and in all places, be estimated and compared. It is their real price; money is their nominal price only. Equal quantities of labour will at distant times he purchased more nearly with equal quantities of corn-the subsistence of the labourer-than with equal quantities of gold, or of any other commodity.
Several elements enter into the price of commodities. In a nation of hunters, if it costs twice the labour to kill a beaver which it costs to kill a deer, one beaver will be worth two deer. But if the one kind of labour be more severe than the other, some allowance will naturally he made for this superior hardship: and thirdly, if one kind of labour requires an uncommon degree of dexterity and ingenuity, it will command a higher value than that which would he due to the time employed in it.
So far the whole produce of labour belongs to the labourer. But as soon as stock has accumulated in the hands of particular persons, some of them will employ it in setting to work industrious workmen, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work.
The profits of stock are not to be regarded as the wages of a particular sort of labour, the labour of inspection and direction; for they are regulated altogether by the value of the stock employed, and are greater or smaller in proportion to the extent of this stock.
There is in every society or neighbourhood an ordinary or average rate both of wages and profit in every different employment of labour and stock; and this rate is regulated partly by the general circumstances of the society, its riches or poverty, and partly by the peculiar nature of each employment.
There is also in every society or neighbourhood an ordinary or average rate of rent, which is regulated, too, by the general circumstances of the society or neighbourhood in which the land is situated, and partly by the natural or improved fertility of the land. What we may call the natural price of any commodity depends upon these natural rates of wages, profit and rent at the place where it is produced. But its market price may vary from its natural price, and depends upon the proportion between the supply and the demand.
Corn is an annual crop. Butcher's-meat, a crop which requires four or five years to grow. As an acre of land, therefore, will produce a much smaller quantity of the one species of food than of the other, the inferiority of the quantity must be compensated by the superiority of the price. If it was more than compensated, more corn land would be turned into pasture; and if it was not compensated, part of what was in pasture would be brought back into corn. Thus in France the proprietors of old vineyards obtained an order prohibiting the planting of new vineyards, under the pretence of a super-abundance of wine. But had this super-abundance been real, it would, without any order of council, have effectually prevented the plantation of new vineyards. Likewise tobacco planters and spice merchants have sometimes burned their crops in plentiful years.
The common people in Scotland, who are fed with oatmeal, are in general neither so strong nor so handsome as the same rank of people in England, who are fed with wheaten bread. But it seems to be otherwise with potatoes. The chairmen, porters, and coal-heavers in London, and those unfortunate women who live by prostitution, the strongest men and the most beautiful women perhaps in the British dominions, are, the greater part of them, from the lowest rank of people in Ireland, who are generally fed with this root.
APPENDIX TO BOOK I
Averaged prices of the quarter of nine bushels of the best
or highest priced wheat at Windsor market, on Lady Day and Michaelmas
NATURE, ACCUMULATION AND EMPLOYMENT OF STOCK
When the stock which a man possesses is no more than sufficient to maintain him for a few days or weeks, he seldom thinks of deriving any revenue from it, but, when he possesses enough to maintain him for months or years, he endeavours to derive a revenue from the greater part of it. The stock from which he derives revenue is called his capital.
There are two ways in which capital may be employed so as to yield a profit to its employer. First, it may he employed in raising, manufacturing, or purchasing goods, and selling them again with a profit; this is circulating capital.
Secondly, it may be employed in the improvement of land. or in the purchase of machines and instruments: and this capital, which yields a profit from objects which do not change masters, is called fixed capital.
The general stock of any country or society is the same as that of all its inhabitants or members and is, therefore, divided into three portions, each of which has a different function. The first is the portion which is reserved for immediate consumption, and so affords no revenue or profit. The second is the fixed capital, which consists of:
(a) All useful machines and instruments of trade which facilitate labour.
(b) All profitable buildings, which procure a revenue, not only to their owner, but also to the person who rents them, such as shops, warehouses, farmhouses, factories, etc.
© The improvements of land, and all that has been laid out in clearing, draining. enclosing, manuring and reducing it into a condition most proper for culture.
(d) The acquired and useful abilities of all the inhabitants or members of the society. The acquisition of such talents, and the maintenance of the learner during his training, costs a real expense, which is a capital fixed in his person.
The third and last of the three portions into which the general stock of society divides itself is the circulating capital, which affords a revenue only by changing masters. It includes:
(a) All the money by means of which the other three are circulated and distributed to their proper consumers.
(b) All the stock of provisions which are in the possession of the butcher, farmer, corn merchant, etc. and from the sale of which they expect to derive a profit.
© All the materials, whether altogether rude, or more or less manufactured, for clothes, furniture and building, which are not yet made up into any of these shapes, but remain in the hands of the growers, manufacturers and merchants.
(d) All the work which is made up and completed, but is not yet disposed of to the proper consumers.
The substitution of paper in the place of gold and silver money replaces a very expensive instrument of commerce by one much less costly, and sometimes equally convenient. Circulation comes to he carried on by a new wheel, which costs less both to erect and to maintain than the old one.
THE PROGRESS OF OPULENCE IN DIFFERENT NATIONS
The greatest commerce of every civilized society is that carried on between the inhabitants of the town and those of the country. It consists in the exchange of rude for manufactured produce, either immediately, or by the intervention of money, or of some sort of paper which represents money. The country supplies the town with the means of subsistence and the materials for manufactures. The town repays this supply by sending back a part of the manufactured produce to the inhabitants of the country. The town, in which there neither is nor can be any reproduction of substances, may very properly be said to gain its whole subsistence from the country. And in how great a degree the country is benefited by the commerce of the town may be seen from a comparison of the cultivation of the lands in the neighbourhood of any considerable town with that of those which lie at some distance from it.
As subsistence is, in the nature of things, prior to convenience and luxury, so the rural industries, which procure the former, must be prior to the urban industries, which minister to the latter. The greater part of the capital of every growing society is therefore directed first to agriculture, afterwards to manufactures, and last of all to foreign commerce.
But this natural order of things has, in all the modern states of Europe, been in many respects entirely inverted. The foreign commerce of some of their cities has given rise to their finer manufactures and manufactures and foreign commerce together have given birth to the principal improvements of agriculture.
The customs which their original government introduced, and which remained after that government was greatly altered, necessarily forced them into this unnatural and retrograde order.
In the ancient state of Europe, after the fall of the Roman Empire, agriculture was greatly discouraged by several causes. The rapine and violence which the barbarians exercised against the ancient inhabitants interrupted the commerce between towns and the country, the towns were deserted and the country was left uncultivated. The western provinces of Europe sank into the lowest state of poverty and the land, which was mostly uncultivated, was engrossed by a few great proprietors.
These lands might, in the natural course of events, have been soon divided again, and broken into small parcels by succession or by alienation: but the law of primogeniture hindered their division by succession, and the introduction of entails prevented their being divided by alienation. These hindrances to the division. and consequently to the cultivation. of the land were due to the fact that land was considered as the means not of subsistence merely, but of power and protection.
In the ancient state of Europe the occupiers of land were all tenants at will, and practically slaves. To these succeeded a kind of farmers known at present in France by the name of 'metayers.' whose produce was divided equally between the proprietor and the farmer, after setting aside what was judged necessary for keeping up the stock, which still belonged to the landlord. To these, in turn, succeeded farmers properly so called, who cultivated the land with their own stock, paying a fixed rent to the landlord and enjoying a certain degree of security of tenure. And every improvement in the position of the actual cultivation of the soil is attended by a corresponding improvement of the land and of its cultivation.
After the fall of the Roman Empire, the inhabitants of cities and towns were not more favoured than those of the country. The towns were inhabited chiefly by tradesmen and mechanics, who in those days were of servile, or nearly servile, condition. Yet the townsmen arrived at liberty and independence much earlier than the country population; their towns became 'free burghs,' and were erected into commonalties or corporations, with the privilege of having magistrates and a town council of their own, of making by-laws for their own government, and of building walls for their own defence. Order and good government, and the liberty and security of individuals, were thus established in cities at a time when the occupiers of land in the country were exposed to every sort of violence.
The increase and riches of commercial and manufacturing towns thenceforward contributed to the improvement and cultivation of the countries to which they belonged in three different ways. First, by affording a great and ready market for the rude produce of the country.
Secondly, the wealth acquired by the inhabitants of cities was employed in purchasing uncultivated lands and in bringing them under cultivation; for merchants are ambitious of becoming country gentlemen, and, when they do so, are generally the best of all improvers.
And, lastly, commerce and manufactures gradually introduced order and good government, and with them as a logical consequence the liberty and security of individuals among the inhabitants of the country.
THE MERCANTILE SYSTEM
From the mistaken theory that wealth consists in money, or in gold and silver, there has arisen an erroneous and harmful system of political economy and of legislation in the supposed interests of manufacture, of commerce and of the wealth of nations. A rich country is supposed to be a country abounding in money; and all the nations of Europe have consequently studied, though to little purpose, every possible means of accumulating gold and silver in their respective countries. For example, they have at times forbidden, or hindered by heavy duties, the export of these metals.
But all these attempts are vain, for, on the one hand, when the quantity of gold and silver imported into any country exceeds the effectual demand, no vigilance can prevent their exportation. The real inconvenience, which is commonly called 'scarcity of money' is not a shortness in the medium of exchange, but is a weakening and diminution of credit, due to over-trading.
The principle of the 'commercial system' or 'mercantile system is that wealth consists in money, or in gold and silver.
It is an utterly untrue principle. But once it had been established in general belief that wealth consists in gold and silver, and that these metals can be brought into a country which has no mines only by the 'balance of trade'- that is to say. by exporting to a greater value than it imports-it necessarily became the great object of political economy to diminish as much as possible the importation of foreign goods for .home consumption, and to increase as much as possible the exportation of the produce of domestic industry. Its great engines for enriching the country, therefore, were restraints upon importation and encouragements to exportation.
The restraints upon importation were of two kinds, First, restraints upon the importation of such foreign goods for home consumption as could be produced at home, from whatever country they were imported; and, secondly, restraints upon the importation of goods of almost all kinds from those particular countries with which the balance of trade was supposed to be disadvantageous. These restraints consisted sometimes in high duties, and sometimes in prohibitions.
Exportation was encouraged sometimes by drawbacks, sometimes by bounties, sometimes by advantageous treaties of commerce with sovereign states, and sometimes by the establishment of colonies in distant countries. The above two restraints, and these four encouragements to exportation, constitute the six principal means by which the commercial or mercantile system proposes to increase the quantity of gold and silver in any country by turning the balance of trade in its favour.
The entire system, in all its developments, is fallacious in theory and evil in its practical effect. It is not difficult to determine who have been the contrivers of this whole mercantile system - not the consumers, whose interest has been entirely neglected, but the producers, and especially the merchants and manufacturers, whose interest has been so carefully attended to.
It remains to be said, also, that the 'agricultural system' which represents the produce of land as the sole source of the revenue and wealth of every country, and as therefore justifying a special protection of it, is as fallacious and as harmful as the other.
THE REVENUE OF THE SOVEREIGN OR COMMONWEALTH
THE first duty of the sovereign - that of protecting the society from the violence and invasion of other independent societies - can be performed only by means of a military force. This may be effected either by obliging all the citizens of the military age, or a certain number of them, to join in some measure the trade of a soldier to whatever other trade or profession they may happen to carry on; or by maintaining a certain number of citizens in the constant practice of military exercises, thus rendering the soldier's occupation a special profession, distinct from all others. A militia is the less expensive, but a standing army is by far the more efficient defence; and its cost falls to be borne by the sovereign or the commonwealth.
The second duty of government is to protect every member of the society from the violence or injustice of other members; and for this purpose courts and magistrates of justice have to be maintained, and officers must be appointed to preserve the internal peace of the community. Another duty is to maintain the means of education, among which we may include not only the universities, but also the Church. The building and maintenance of roads, bridges, canals and other communications, which cannot be undertaken by private enterprise, must also be reckoned among the duties of the sovereign.
The cost of all these functions of sovereignty is defrayed by taxation; and the great principles of taxation are that the taxes should be proportioned to the means of those who have to pay them, and that the collection of every tax should be as inexpensive and as little irksome or vexatious to the public as possible.
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