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Primary Source 9.
ADAM SMITH, THE WEALTH OF NATIONS (1776): ON
MERCANTILISM^1
During the seventeenth and eighteenth centuries, Europeans accumulated vast useful knowledge about economic activity. Applying scientific approaches to these data, scholars and thinkers devised theories of economic development. Since long-term economic growth had never occurred and people’s standards of living had never perceptibly and consistently risen, it had previously made little sense to formulate such theories. Only in early modern Europe, where scientific thinking was gradually applied to all human endeavors and a commercial revolution yielded sustained economic growth, did systematic economic thought emerge. Adam Smith (1723–90), a Scottish philosopher, economist, and political thinker, in An Inquiry into the Nature and Causes of the Wealth of Nations (1776), scrutinized the three principal economic theories or philosophies of his time. The first, Mercantilism, discussed in the passage below, he often referred to as the “commercial system.” It argued for the need to foster a positive balance of trade by encouraging exports and discouraging imports (except of raw materials). The second, called Physiocracy or the “agricultural system,” developed in France in direct opposition to the first. (For Smith’s analysis of Physiocracy, click here.) Never actually implemented by any government, it contended that all wealth stems from the land and that commercial activity is merely derivative and even “unproductive.” Smith rejected both theories in favor of what today is known as free-market economics (discussed in Primary Source 11.1). This philosophy holds that money and precious metals are merely a convenient means of exchange, whereas he considered the totality of economic output of any country the true measure of its wealth. He asserted further that economic actors (anyone who buys or sells anything) will tend to produce wealth more efficiently without government interference (such as monopoly protections of business). Given the extraordinary success of free exchange and market economics over the following two and nearly one-half centuries, Smith was obviously onto something. For the full text online, click here. For a freely accessible audio recording of Book 4, from which the excerpts below are taken, click here.
BOOK IV. OF SYSTEMS OF POLITICAL ECONOMY.
CHAPTER I.
OF THE PRINCIPLE OF THE COMMERCIAL OR MERCANTILE SYSTEM.
That wealth consists in money, or in gold and silver, is a popular notion which naturally arises from the double function of money, as the instrument of commerce, and as the measure of value. In consequence of its being the instrument of commerce, when we
(^1) Adam Smith, An Inquiry into the Nature and Causes of Wealth of Nations (London: T. Nelson and Sons, 1852), 173 – 77, 175–76, 177, 183–85..
have money we can more readily obtain whatever else we have occasion for, than by means of any other commodity. The great affair, we always find, is to get money. When that is obtained, there is no difficulty in making any subsequent purchase. In consequence of its being the measure of value, we estimate that of all other commodities by the quantity of money which they will exchange for. We say of a rich man that he is worth a great deal, and of a poor man that he is worth very little money. A frugal man, or a man eager to be rich, is said to love money; and a careless, a generous or a profuse man, is said to be indifferent about it. To grow rich is to get money; and wealth and money, in short, are in common language considered as in every respect synonymous. A rich country, in the same manner as a rich man, is supposed to be a country abounding in money; and to heap up gold and silver in any country is supposed to be the readiest way to enrich it. For some time after the discovery of America, the first inquiry of the Spaniards, when they arrived upon any unknown coast, used to be, if there was any gold or silver to be found in the neighbourhood? By the information which they received, they judged whether it was worth while to make a settlement there, or if the country was worth the conquering.... Mr Locke^2 remarks a distinction between money and other movable goods. All other movable goods, he says, are of so consumable a nature that the wealth which consists in them cannot be much depended on, and a nation which abounds in them one year may, without any exportation, but merely by their own waste and extravagance, be in great want of them the next. Money, on the contrary is a steady friend, which, though it may travel about from hand to hand, yet if it can be kept from going out of the country, is not very liable to be wasted and consumed. Gold and silver, therefore are, according to him, the most solid and substantial part of the movable wealth of a nation, and to multiply those metals ought, he thinks, upon that account, to be the great object of its political economy. Others admit that if a nation could be separated from all the world, it would be of no consequence how much or how little money circulated in it. The consumable goods which were circulated by means of money, would only be exchanged for a greater or a smaller number of pieces; but the real wealth or poverty of a country, they allow, would depend altogether upon the abundance or scarcity of those consumable goods. But it is otherwise, they think, with countries which have connections with foreign nations, and which are obliged to carry on foreign wars, and to maintain fleets and armies in distant countries. This, they say, cannot be done but by sending abroad money to pay them with; and a nation cannot send much money abroad, unless it has a good deal at home. Every such nation, therefore must endeavour in time of peace to accumulate gold and silver, that, when occasion requires, it may have wherewithal to carry on foreign wars. In consequence of these popular notions, all the different nations of Europe have studied, though to little purpose, every possible means of accumulating gold and silver in their respective countries. Spain and Portugal, the proprietors of the principal mines which supply Europe with those metals,^3 have either prohibited their exportation under the severest penalties, or subjected it to a considerable duty. The like prohibition seems anciently to have made a part of the policy of most other European nations. It is even to be
(^2) John Locke (1632–1704) was an English philosopher and political thinker. (^3) Spain and Portugal controlled the gold and silver mines in Brazil and Peru, which provided most of Europe’s supply at this time.
exportation of foreign coin and of bullion^5 was made free. In Holland, and in some other places, this liberty was extended even to the coin of the country. The attention of government was turned away from guarding against the exportation of gold and silver, to watch over the balance of trade, as the only cause which could occasion any augmentation or diminution of those metals. From one fruitless care it was turned away to another care much more intricate, much more embarrassing, and just equally fruitless. The title of Mun’s book, England’s Treasure in Foreign Trade ,^6 became a fundamental maxim in the political economy, not of England only, but of all other commercial countries. The inland or home trade, the most important of all, the trade in which an equal capital affords the greatest revenue, and creates the greatest employment to the people of the country, was considered as subsidiary only to foreign trade. It neither brought money into the country, it was said, nor carried any of it out of it. The country, therefore, could never become either richer or poorer by means of it, except so far as its prosperity or decay might indirectly influence the state of foreign trade. A country that has no mines of its own must undoubtedly draw its gold or silver from foreign countries, in the same manner as one that has no vineyards of its own must draw its wines. It does not seem necessary, however, that the attention of government should be more turned towards the one than towards the other object. A country that has wherewithal to buy wine, will always get the wine which it has occasion for; and a country that has wherewithal to buy gold and silver, will never be in want of those metals. They are to be bought for a certain price like all other commodities, and as they are the price of all other commodities, so all other commodities are the price of those metals. We trust with perfect security that the freedom of trade, without any attention of government, will always supply us with the wine which we have occasion for; and we may trust with equal security that it will always supply us with all the gold and silver which we can afford to purchase or to employ, either in circulating our commodities,^7 or in other uses. The quantity of every commodity, which human industry can either purchase or produce, naturally regulates itself in every country in accordance to the effectual demand, or according to the demand of those who are willing to pay the whole rent, labour, and profits^8 which must be paid in order to prepare and bring it to market. But no commodities regulate themselves more easily or more exactly according to this effectual demand than gold and silver; because, on account of the small bulk and great value of those metals, no commodities can be more easily transported from one place to another, from the places where they are cheap to those where they are dear; from the places where they exceed, to those where they fall short of this effectual demand. If there was in England, for example, an effectual demand for an additional quantity of gold, a packet-boat^9 could bring from Lisbon, or wherever else it was to be had, fifty tons of gold, which could be coined into more than five millions of guineas.^10 But if there was an effectual demand for grain to the
(^5) Bars of gold, silver, or other precious metals. (^6) Published in 1664 in support of mercantilism. (^7) That is, as a medium of exchange, or money. (^8) A fundamental tenet of Smith’s thinking is that the entire wealth and output of any country are divided into these three elements: rent, labor, and profits. (^9) A small boat used for transporting mail, people, or other cargo. (^10) A British gold coin worth 21 shillings, used until 1816.
same value, to import it would require, at five guineas a ton, a million tons of shipping, or a thousand ships of a thousand tons each. The navy of England would not be sufficient. When the quantity of gold and silver imported into any country exceeds the effectual demand, no vigilance of government can prevent their exportation. All the sanguinary^11 laws of Spain and Portugal are not able to keep their gold and silver at home. The continual importations from Peru and Brazil exceed the effectual demand of those countries, and sink the price of those metals there below that in the neighbouring countries. If, on the contrary, in any particular country their quantity fell short of the effectual demand, so as to raise their price above that of the neighbouring countries, the government would have no occasion to take any pains to import them. If it was even to take pains to prevent their importation, it would not be able to effectuate it.... It is partly owing to the easy transportation of gold and silver from the places where they abound to those where they are wanted, that the price of those metals does not fluctuate continually like that of the greater part of other commodities, which are hindered by their bulk from shifting their situation, when the market happens to be either over or understocked with them. The price of those metals, indeed, is not altogether exempted from variation, but the changes to which it is liable are generally slow, gradual and uniform. In Europe, for example, it is supposed, without much foundation perhaps, that, during the course of the present and preceding century, they have been constantly, but gradually sinking in their value, on account of the continual importations from the Spanish West Indies. But to make any sudden change in the price of gold and silver, so as to raise or lower at once, sensibly and remarkably, the money price of all other commodities, requires such a revolution in commerce as that occasioned by the discovery of America. If, notwithstanding all this, gold and silver should at any time fall short in a country which has wherewithal to purchase them, there are more expedients for supplying their place than that of almost any other commodity. If the materials of manufacture are wanted, industry must stop. If provisions are wanted, people must starve. But if money is wanted, barter will supply its place, though with a good deal of inconveniency. Buying and selling upon credit, and the different dealers compensating their credits with one another, once a month or once a year, will supply it with less inconveniency. A well-regulated paper money will supply it, not only without inconveniency, but in some cases with some advantages. Upon every account, therefore, the attention of government never was so unnecessarily employed as when directed to watch over the preservation or increase of the quantity of money in any country. No complaint, however, is more common than that of a scarcity of money. Money, like wine, must always be scarce with those who have neither wherewithal to buy it, nor credit to borrow it. Those who have either, will seldom be in want either of the money or of the wine which they have occasion for.... It is not any scarcity of gold and silver, but the difficulty which such people find in borrowing, and which their creditors find in getting payment, that occasions the general complaint of the scarcity of money. It would be too ridiculous to go about seriously to prove that wealth does not consist in money, or in gold and silver, but in what money purchases, and is valuable only for purchasing. Money, no doubt, makes always a part of the national capital; but it has
(^11) Involving bloodshed; here, meaning “harsh.”
direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. To give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful. 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. The taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbours, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for. What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished, no more than that of the above-mentioned artificers; but only left to find out the way in which it can be employed with the greatest advantage. It is certainly not employed to the greatest advantage when it is thus directed towards an object which it can buy cheaper than it can make. The value of its annual produce is certainly more or less diminished when it is thus turned away from producing commodities evidently of more value than the commodity which it is directed to produce. According to the supposition, that commodity could be purchased from foreign countries cheaper than it can be made at home. It could, therefore, have been purchased with a part only of the commodities, or,
what is the same thing, with a part only of the price of the commodities, which the industry employed by an equal capital would have produced at home, had it been left to follow its natural course. The industry of the country, therefore, is thus turned away from a more to a less advantageous employment, and the exchangeable value of its annual produce, instead of being increased, according to the intention of the lawgiver, must necessarily be diminished by every such regulation. By means of such regulations, indeed, a particular manufacture may sometimes be acquired sooner than it could have been otherwise, and after a certain time may be made at home as cheap or cheaper than in the foreign country. But though the industry of the society may be thus carried with advantage into a particular channel sooner than it could have been otherwise, it will by no means follow that the sum total, either of its industry, or of its revenue, can ever be augmented by any such regulation. The industry of the society can augment only in proportion as its capital augments, and its capital can augment only in proportion to what can be gradually saved out of its revenue. But the immediate effect of every such regulation is to diminish its revenue, and what diminishes its revenue is certainly not very likely to augment its capital faster than it would have augmented of its own accord had both capital and industry been left to find out their natural employments.
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