Skinner, Andrew S., “Smith, Adam,” The New Palgrave: A Dictionary of Economics, Vol. 4 (Q to Z), John Eatwell et al., eds. (Macmillan Press, 1987), pp. 357–375.

Adam Smith was born in Kirkcaldy, on the east coast of Scotland, and baptized on 5 June, 1723. He was the son of Adam Smith, Clerk to the Court Martial and Comptroller of Customs in the town (who died before his son was born) and of Margaret Douglas of Strathendry.

Smith attended the High School in Kirkcaldy, and then proceeded to Glasgow University. He first matriculated in 1737, at the not uncommon age of fourteen. At this time the university, or more strictly the college, was small. It housed only twelve professors who had in effect replaced the less specialized system of regents by 1727. Of the professoriate, Smith was most influenced by the “never-to-be-forgotten” Francis Hutcheson (Corr., letter 274, dated 16 November 1787). Hutcheson had succeeded Gerschom Carmichael, the distinguished editor of Pufendorf’s De Officio Hominis et Civis, as Professor of Moral Philosophy.

Smith left Glasgow in 1740 as a Snell Exhibitioner at Balliol College to begin a stay of six years. The atmosphere of the college at this time was Jacobite and “anti-Scotch.” Smith was also to complain: “In the university of Oxford, the greater part of the publick professors have, for these many years, given up altogether even the pretence of teaching” (WN, V. i. f. 8). But there were benefits, most notably ease of access to excellent libraries, which in turn enabled Smith to acquire and extensive knowledge of English and French literature, which was to prove invaluable.

Smith left Oxford in 1746 and returned to Kirkcaldy without a fixed plan. But in 1748 he was invited to give a series of public lectures in Edinburgh, with the support of three men—the Lord Advocate, Henry Home; Lord Kames; and a childhood friend, James Oswald of Dunnikier.

The lectures, which are thought to have been primarily concerned with rhetoric and belles lettres brought Smith £100 a year (Corr., letter 25, dated 8 June 1758). They also seem to have been wide-ranging.

Smith’s reputation as a lecturer brought its reward. In 1751 he was elected to the Chair of Logic in Glasgow University, again with the support of Lord Kames. According to John Millar, Smith’s most distinguished pupil, he devoted the bulk of his time to the delivery of a system of rhetoric and belles lettres, which was based on the conviction that the best way of

explaining and illustrating the various powers of the human mind, the most useful part of metaphysics, arises from an examination of the several ways of communicating our thoughts by speech, and from an attention to the principles of those literary compositions which contribute to persuasion or entertainment (Stewart, I. 16).

Smith continued to teach the main part of his lecture course on logic after he had been translated to the Chair of Moral Philosophy in 1752. A set of lecture notes, discovered by J.M. Lothian in 1958, relate to the session 1762/3. The notes correspond closely to Millar’s description of the course given more than a decade earlier, in that they are concerned with such problems as the development of language, style and the organization of forms of discourse which include the oratorical, narrative and didactical. Smith was primarily concerned with the study of human nature and with the analysis of the means and forms of communication. He no double continued to lecture on these subjects to students of moral philosophy because he rightly believed them to be important (see J.M. Lothian, 1963; W.S. Howell, 1975).

Smith’s lectures on language were published in expanded form as Considerations Concerning the First Formation of Language, in the Philological Miscellany for 1761. They were reprinted in the third edition of the Theory of Moral Sentiments in 1767.

Smith’s teaching from the Chair of Moral Philosophy fell into four parts and in effect set the scene for the major published works which were to follow. Again on the authority of John Millar, it is known that Smith lectured on natural theology, ethics, jurisprudence and “expediency,” or economics, in that order. The lectures on natural theology (a sensitive subject at the time) have not yet been found. But Millar made it clear that the lectures on ethics form the basis for the Theory of Moral Sentiments and that the subjects covered in the last part of the course were to be further developed in the Wealth of Nations (Stewart, I. 20). As to the third part, on jurisprudence, Millar noted that:

Upon this subject he followed the plan that seems to be suggested by Montesquieu; endeavouring to trace the gradual progress of jurisprudence, both public and private, from the rudest to the most refined ages, and to point out the effects of those arts which contribute to subsistence, and to the accumulation of property, in producing correspondent improvements or alterations in law and government (Stewart, I. 19).

Illustration and confirmation of this claim proved impossible until 1896 when Edwin Cannan published an edition of the Lectures on Jurisprudence. The notes edited by Cannan are dated 1766, although they were taken in the session 1763/4. This was Smith’s last session in Glasgow, so that these lectures, where “public” (broadly constitutional law) precedes “private” jurisprudence (concerning man’s rights as a citizen), may reflect a preferred order. A second set of notes, this time relating to the previous session, were also found by J.M. Lothian as recently as 1958 and are here styled LJ(A).

Academically, the major event for Smith was the publication of the Theory of Moral Sentiments in 1759. The book was well received by both the public and Smith’s friends. In a delightful letter Hume reminded Smith of the futility of fame and public approbation, and having encouraged him to be a philosopher in practice as well as profession, continued:

Supposing therefore, that you have duely prepared yourself for the worst by these Reflections; I proceed to tell you the Melancholy News, that your Book has been most unfortunate: For the Public seem disposed to applaud it extremely (Corr., letter 31, dated 12 April 1759).

The book was to establish Smith’s reputation. There was a second revised edition in 1761 and further editions in 1767, 1774, 1781 and 1790.

Charles Townshend was among those to whom Hume had sent a copy of Smith’s treatise. Townshend had married the widowed Countess of Dalkeith in 1755 and was sufficiently impressed by Smith’s work as to arrange for his appointment as tutor to her son, the young Duke of Buccleuch. The position brought financial security (£300 sterling p.a. for the rest of his life), and Smith duly accepted, formally resigning his chair early in 1764.

Smith and his party left almost immediately for France to begin a sojourn of some two years. At the outset, the visit was unsuccessful, causing Smith to write to Hume, with some humour, that “I have begun to write a book in order to pass away the time. You may believe I have very little to do” (Corr., letter 82, date[d] 5 July 1764, Toulouse).

But matters improved with Smith’s increasing familiarity with the language and the success of a series of short tours. In 1765 Smith, the Duke, and the Duke’s younger brother Hew Scott, reached Geneva, giving Smith an opportunity to meet Voltaire, whom he genuinely admired as “the most universal genius perhaps which France has ever produced” (Letter, 17). The party arrived in Paris in mid-February 1766, where Smith’s fame, together with the efforts of David Hume, secured him a ready entré to the leading salons and, in turn, introductions to philosophes such as d’Alembert, Holback and Helvetius.

During this period Smith met François Quesnay, the founder, with the Marquis de Mirabeau, of the Physiocratic School of economics (Meek, 1962). By the time Smith met Quesnay, the latter’s model of the economic system as embodied in the Tableau Economique ([1757], trans. in Meek, 1962) had already been through a number of editions. Quesnay was then working on the Analyse (trans. in Meek, 1962), while it is also known that A.R.J. Turgot was currently engaged on his Reflections on the Formation and Distribution of Riches (trans. in Meek, 1973).

Smith, who had already developed an interest in political economy, had arrived in Paris at the very point in time that the French School had reached the zenith of its influence and output. The contents of Smith’s library amply confirm his interest in this work (Mizuta, 1967).

Smith’s stay in Paris had been enjoyable both socially and in academic terms. But it was marred by the developing quarrel between Hume and Rousseau and sadly terminated by the death of Hew Scott. Smith returned to London on 1 November 1766.

Smith spent the winter in London, where he was consulted by Townshend and engaged in corrections for the third edition of the Theory of Moral Sentiments. By the spring of 1767 (the year in which Sir James Steuart published his Principles of Political Oecenomy) Smith was back in Kirkcaldy to begin a study of some six years. It was during this period that he struggled with the Wealth of Nations. Correspondence of the time amply confirms the mental strain involved. But by 1773 Smith was ready to return to London, leaving his friends, notably David Hume, under the impression that completion was imminent. As matters turned out, it took Smith almost three more years to finish his book; a delay which may have been due in part to his increasing concern with the American War of Independence and with the wider issue of the relationship between the colonies and the “mother country” (WN, IV. vii).

An Inquiry into the Nature and Causes of the Wealth of Nations was published by Strahan and Cadell on 9 March 1776, and elicited once more a warm response from Hume:

Dear Mr. Smith: I am much pleas’d with your Performance, and the Perusal of it has taken me from a State of great Anxiety. It was a Work of so much Expectation, by yourself, by your Friends, and by the Public, that I trembled for its Appearance; but am now much relieved. Not but the Reading of it necessarily requires so much Attention, and the Public is disposed to give so little, that I shall still doubt for some time of its being at first very popular (Corr., letter 150, dated 1 April 1776).

In fact, the book sold well, with subsequent editions in 1778, 1784, 1786 and 1789.

1776 was marred for Smith by the death of David Hume, after a long illness, and by his concern over the future of the latter’s Dialogues Concerning Natural Religion. This work, together with Hume’s account of “My Own Life” had been left in the care of William Strahan, to whom Smith wrote expressing the hope that the Dialogues should remain unpublished, although Hume himself had determined otherwise.

But Smith proposed to “add to his life a very well authenticated account” of Hume’s formidable courage during his last illness (Corr., letter 172, dated 5 September 1776). The letter was published in 1777, and as Smith wrote later to Andreas Holt, “brought upon me ten times more abuse than the very violent attack I had made upon the whole commercial system of Great Britain” (Corr., letter 208, dated October 1780).

In 1778 Smith was appointed Commissioner of Customs, due in part to the efforts of the Duke of Buccleuch. The office brought an income of £600, in addition to the pension of £300 which the Duke refused to discontinue (Corr., letter 208). Smith settled in Edinburgh, where he was joined by his mother and a cousin, Janet Douglas.

During 1778 Alexander Wedderburn sought Smith’s advice on the future conduct of affairs in America. Smith’s “Thoughts on the State of the Contest with America” were written in the aftermath of the battle of Saratoga. The Memorandum was first published by G.H. Guttridge in the American Historical Review (vol. 38, 1932/3).

In this document, Smith rehearsed a number of arguments which he had already stated in WN (IV, vii. c). He advocated the extension of British taxes to Ireland and to America, provided that representatives from both countries were admitted to Parliament at Westminster in conformity with accepted constitutionally practice. Smith noted that “Without a union with Great Britain, the inhabitants of Ireland are not likely for many ages to consider themselves as one people” (WN, V. iii. 89). With respect to America, he observed that her progress had been so rapid that “in the course of little more than a century, perhaps, the produce of American might exceed that of British taxation. The seat of the empire would then naturally remove itself to that part of the empire which contributed most to the general defence and support of the whole” (WN, IV. vii. c. 79).

But Smith also repeated a point already made in WN; namely, that the opportunity for union had been lost, and proceeded to review the bleak options, now all too familiar, which were actually open to the British Government. Military victory was increasingly unlikely (WN, V. i. a. 27) and military government, even in the event of victory, unworkable (Corr., 383). Voluntary withdrawal from the conflict was a rational but politically impracticable course, given the probable impact on domestic and world opinion (ibid.). The most likely outcome, in Smith’s view, was the loss of the thirteen united colonies and the successful retention of Canada—the worst possible solution since it was also the most expensive in terms of defence (Corr., 385).

Smith worked hard as a Commissioner, and to an extent which, as he admitted, affected his literary pursuits (Corr., letter 208). But in this period he completed the third edition of WN (1784), incorporating major developments which were separately published as “Additions and Corrections.” The third edition also features an index and a long concluding chapter to Book IV entitled “Conclusion of the Mercantile System.”

After 1784 Smith must have devoted most of his attention to the revision of TMS. The sixth edition of 1790 features an entirely new Part VI which includes a further elaboration of the role of conscience, and the most complete statement which Smith offered as to the complex social psychology which lies behind man’s broadly economic aspirations.

In addition to the essay on the “Imitative Arts,” which is mentioned in his letter to Andreas Holt (Corr., letter 208), Smith observed that “I have likewise two other great works upon the anvil; the one is a sort of Philosophical History of all the different branches of Literature, of Philosophy, Poetry and Eloquence; the other is a sort of theory and History of Law and Government” (Corr., letter 248 dated 1 November 1785, addressed to the Duc de la Rochefoucauld).

Smith’s literary ambitions also feature in the Advertisement to the 1790 edition of TMS, where he drew attention to the concluding sentences of the first edition of 1759. In these passages Smith makes it clear that TMS and WN are parts of a single plan which he hoped to complete with a published account of “the general principles of law and government, and of the different revolutions which they had undergone in the different ages and periods of society.” Smith’s “present occupations” and “very advanced age” prevented him from completing this great work, although the approach is illustrated by LJ(A) and LJ(B), and by those passages in WN which can now be recognized as being derived from them (most notably WN, III and V. i. a, b).

Smith died on 17 July 1790, having first instructed his executors, Joseph Black and James Hutton, to burn his papers, excepting those which were published in Essays on Philosophical Subjects (1795).

In what follows, Smith’s system will be expounded in terms of the order of argument which he is known to have employed as a lecturer; namely, ethics, jurisprudence and economics. Each separate area of analysis may be represented as highly systematic: all are interdependent, forming in effect the component sections of a greater whole.

The Theory of Moral Sentiments

The Theory of Moral Sentiments shows clear evidence of a model, and of a form of argument which is in part designed to explain how so self-regarding a creature as man succeeds in erecting barriers against his own passions.

In Part VII of TMS, Smith reviewed different approaches to the questions confronting the philosopher in this field, basically as a means of differentiating his own contribution from them.

In Smith’s view there were two main questions to be answered: “First, wherein does virtue consist,” and secondly, “by what means does it come to pass, that the mind prefers one tenour of conduct to another”? (TMS, VII. i. 2). In dealing with the first question, Smith described all classical and modern theories in terms of the emphasis given to the qualities of propriety, prudence and benevolence. In each case, he argued that the identification of a particular quality was appropriate, but rejected what he took to be undue emphasis on any one. He criticized those who found virtue in propriety, on the ground that this approach emphasized the importance of self-command at the expense of “softer” virtues, such as sensibility. He rejected others who found virtue in prudence because of the emphasis given to qualities which are useful, thus echoing his criticism of David Hume in TMS, Part IV. In a similar way, while he admired benevolence, Smith argued that proponents of this approach (notably Francis Hutcheson) had neglected virtues such as prudence.

Smith’s criticism of Hutcheson’s teaching is remarkable for the emphasis which he gave to self-interest and his denial of Hutcheson’s proposition that self-love “was a principle which could never be virtuous in any degree or in any direction” (TMS, VII. ii. 3. 12). Smith also rejected the argument of Mandeville, whose fallacy it was “to represent every passion as wholly vicious, which is so in any degree” (TMS, VII. ii. 4. 12). Smith contended that “The condition of human nature were peculiarly hard, if these affections, which, by the very nature of our being, ought frequently to influence our conduct, could upon no occasion appear virtuous, or deserve esteem and commendation from anybody” (TMS, VII. ii. 3. 18).

A further distinctive element in Smith’s approach emerges in his treatment of the second question. He accepted Hutcheson’s argument that the perception of right and wrong rests not upon reason but “immediate sense and feeling” (TMS, VII. iii. 2. 9). But Smith rejected Hutcheson’s emphasis on a special sense, the moral sense, which was treated as being analogous to “external” senses, such as sight or touch. But in so doing Smith in effect elaborated on the argument of his teacher, who had already presented moral judgements as being disinterested and as based upon sympathy or fellow-feeling. Smith also enlarged on the role of the spectator, which had been a feature of the work done by Hutcheson and Hume.

Smith argued that the spectator may form a judgement with respect to the activities of another person by visualizing how he would have behaved or felt in similar circumstances. It is this capacity for acts of imaginative sympathy which permits the spectator to form a judgement as to the propriety or impropriety of the conduct observed, and as to the “suitableness or unsuitableness, the proportion or disproportion which the affection seems to bear to the cause or object which excites it” (TMS, I. i. 3. 6).

Since we can “enter into” the feelings of another person only to a limited degree, Smith was able to identify the “amiable” virtue of sensibility with the quality of imagination, and that of self-command with a capacity to control expressions or feeling to such an extent as to permit the spectator to comprehend, and thus to “sympathize,” with them.

The argument was extended to take account of those actions which have consequences for other people, in suggesting that in such cases the spectator may seek to form a judgement as to the propriety of the action taken and of the reaction to it. The sense of merit “seems to be a compounded sentiment, and to be made up of two distinct emotions; a direct sympathy with the sentiments of the agent, and an indirect sympathy with the gratitude of those who receive the benefit of his actions” (TMS, II. i. 5. 2). Conversely, a sense of demerit is compounded of “antipathy to the affections and motives of the agent” and “an indirect sympathy with the resentment of the sufferer” (TMS, II. I. 5. 4).

Smith further contended that “Nature, when she formed man for society, endowed him with an original desire to please, and an original aversion to offend his brethren” (TMS, III. 2. 6).

But this general disposition is not of itself sufficient to ensure an adequate degree of control. The first problem which Smith confronted is that of information, a problem which arises from the fact that the actual spectator of the conduct of another person is unlikely to be familiar with his motives.

Smith solved this problem by arguing that we tend to judge our own conduct by trying to visualize the reaction of an imagined or “ideal spectator” to it; that is, by seeking to visualize the reaction of a spectator, who necessarily fully informed, with regard to our own motives. Smith gave more and more attention to the role of the ideal spectator in successive editions as an important source of control; that is, to the voice of “reason, principle, conscience … the great judge and arbiter of our conduct” (TMS, III. 3. 4). Looked at in this way, the argument depends on man’s desire not merely for praise, but praiseworthiness (TMS, III. 2. 32).

The second problem arises from the fact that Smith, following Hume, presents man as an active, self-regarding being, whose legitimate pursuit of the objects of ambition, notably wealth, can on some occasions have hurtful consequences for others. The difficulty here is that of partiality of view, even where we have the information which is needed to arrive at accurate judgements. When we are about to act, “the eagerness of passion will seldom allow us to consider what we are doing with the candour of an indifferent person,” while after we have acted, we often “turn away our view from those circumstances which might render … judgement unfavourable” (TMS, III. 4. 3–4). The solution to this particular problem is found in man’s capacity for generalization on the basis of particular experience:

It is thus that the general rules of morality are formed. They are ultimately founded upon experience of what, in particular instances, our moral faculties, our natural sense of merit and propriety, approve, or disapprove of. … The general rule … is formed, by finding from experience, that all actions of a certain kind, or circumstanced in a certain manner, are approved or disapproved of (TMS, III. 4. 8).

It is these rules that provide the yardstick against which man can judge his actions in all circumstances; rules which command respect by virtue of the desire to be praiseworthy and which are further supported by the fear of God (TMS, III. 5. 12).

Smith thus offered an explanation of the way in which men were fitted for society, arguing in effect that they typically erect a series of barriers to the exercise of their own (self-regarding) passions, which culminate in the emergence of generally accepted rules of behaviour.

The rules themselves vary in character. Those which relate to justice “may be compared to the rules of grammar; the rules of the other virtues, to the rules which critics lay down for the attainment of what is sublime and elegant in composition. The one, are precise, accurate and indispensable. The other, are loose, vague, and indeterminate” (TMS, III. 6. 11).

But Smith was in no doubt that the rules of justice were indispensable. Justice “is the main pillar that upholds the whole edifice” (TMS, II. ii. 3. 4). Smith added that the final precondition of social order was a system of positive law, embodying current conceptions of the rules of justice and administered by some system of magistracy:

As the violation of justice is what men will never submit to from one another, the public magistrate is under the necessity of employing the power of the commonwealth to enforce the practice of this virtue. Without this precaution, civil society would become a scene of bloodshed and disorder, every man revenging himself at his own hand whenever he fancied he was injured (TMS, VII. iv. 36).

Smith’s ethical argument forms an integral part of his treatment of jurisprudence precisely because it is concerned to show how particular rules of behaviour emerge. In LJ the focus is narrower than in TMS, but it is still the spectator that is of critical importance whether Smith is discussing accepted standards of punishment or of law. Attention has also been drawn to the role of the magistrate in this connection (Bagolini, 1975) and of the Legislator (Haakonssen, 1981).

Smith’s emphasis in TMS is interesting. He chose to concentrate on the means by which the mind forms judgements as to what is fit and proper to be done or to be avoided, as distinct from trying to formulate specific rules of behaviour. He had recognized that while the processes of judgement might claim universal validity, specific judgements must be related to experience.

No one living in the age of Montesquieu could fail to be aware of variations in standards of accepted behaviour in different societies at the same point in time, and in the same societies over time. The point at issue seems to have been grasped by Edmund Burke in writing to Smith: “A theory like yours founded on the Nature of man, which is always the same, will last, when those that are founded upon his opinions, which are always changing, will and must be forgotten” (Corr., letter 38, dated 10 September 1759).

But Smith did not deny that common elements could be found on the basis of experience. Although he did not complete his intended account of the “general principles” involved (TMS, VII. iv. 37), Smith did provide an argument which related the discussion of private and public jurisprudence to four broad types of socio-economic environment, the stages of hunting, pasture, farming and commerce. The importance of the argument in the present context is that it was designed in part to explain the origin of government, thus solving a problem which was only noted in TMS. At the same time the historical dimension throws light on the causes of change in accepted rules of behaviour. As part of the same exercise, Smith supplied a successful account of the emergence of the stage of commerce, the stage with which he, as an economist, was primarily concerned.

The History of Civil Society

The first stage of society was represented as the “lowest and rudest,” such “as we find it among the native tribes of North America” (WN, V. i. a. 2). In this case life is supported by gathering the fruits of the earth, by hunting and fishing. As a result, Smith suggested that such communities would be small and characterized by a high degree of personal liberty. He also noted that disputes between different members of the community would be limited in the absence of private property, and that “there is seldom any established magistrate or any regular administration of justice” (WN, V. i. b. 2) in this situation.

The second stage, that of pasture, is represented as a “more advanced state of society, such as we find it among the Tartars and Arabs” (WN, V. i. a. 3). Here the use of cattle is the dominant economic activity, indicating that communities would be larger in size and nomadic in character. But the key feature of the second stage was found in the emergence of a form of property which could be accumulated and transmitted from one generation to another. It is property which “necessarily requires the establishment of civil government” (WN, V. i. b. 2). Elsewhere he noted that “Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor” (WN, V. i. b. 12). In another passage where Smith associated the emergence of government with the stage of pasture, he drew the attention of his auditors to the proposition that “Laws and government may be considered in this and indeed in every case as a combination of the rich to oppress the poor” (LJ(A), iv. 22–3).

At the same time, Smith noted that the prevailing form of economic organization must lead to a high degree of dependence, since those who do not own the means of subsistence have no way of earning it save through personal service:

The second period of society, that of shepherds, admits of very great inequalities of fortune, and there is no period in which the superiority of fortune gives so great an authority to those who possess it. There is no period accordingly in which authority and subordination are more perfectly established (WN, V. i. b. 7).

In effect, Smith used contemporary evidence regarding the Arabs, Tartars and North American Indians to illustrate the socio-economic stages through which the nations which overran the Western (Roman) Empire had probably passed. It is in this and in this sense only that the term “conjectural history” accurately reflects Smith’s purpose (Stewart, II. 48).

The German and Scythian nations had already attained what is in effect a higher form of the second stage, with some idea of agriculture and property in land. Smith argued that these nations would naturally use existing institutions in their new situation, and that their first act would be a division of the conquered territories (WN, III. ii. 1). In this way, Smith traced the movement from the second to the third stage, that of agriculture. Here property in land is the source of power and distinction, although the basic pattern of subordination remains the same.

But the feature on which Smith concentrated most attention was that of political instability: “In those disorderly times, every great landlord was a sort of petty prince. His tenants were his subjects. He was their judge, and in some respects their legislator in peace, and their leader in war” (WN, III. ii. 3). The first historical response to this situation led to the emergence of the feudal system, which Smith represents as involving a complex of agreements for mutual service and protection. But even here: “The authority of government still continued to be, as before, too weak in the head and too strong in the inferior members, and the excessive strength of the inferior members was the cause of the weakness of the head” (WN, III. iv. 9).

The second response was the most critical and is illustrated by the support given by monarchs to cities, partly as a means of enabling their inhabitants to protect themselves, but largely with a view to forming a new tactical alliance (WN, III. iii) which could offset the power of the aristocracy. Cities emerged as “a sort of independent republicks” with important powers of self-government which brought “along with them the liberty and security of individuals” (WN, III. iii. 8, 12).

The institution of the self-governing city was to satisfy a basic precondition of economic growth (as it had done in classical Greece), especially where it was supported by ease of access to the sea. Growth was based on foreign trade, and Smith proceeded to trace a general pattern which was based upon particular examples, such as Venice, Genoa and Pisa. This pattern initially involved the importation of foreign manufactures in exchange for limited surpluses in primary products, to be followed by the development of domestic manufactures based on foreign materials, and then by a process of refinement to those “coarse and rude” products which were domestic in origin. Such developments, Smith continued, made it quite possible for the city to “grow up to great wealth and splendor, while not only the country in its neighbourhood, but all those to which it traded, were in poverty and wretchedness” (WN, III. iii. 13).

But in the next part of the analysis, Smith outlined the way in which the pattern of economic growth based on the city would impinge on the agrarian sector. He argued that economies based upon manufacture and trade inevitably provided the great proprietors of land with a means of expending their surpluses, thus giving an incentive to maximize them (WN, III. iv. 10). This led to the gradual dismissal of retainers and to a process of modification in the pattern of leaseholding; a process which witnessed a move away from the use of slave labour to the metayer system, and eventually to the appearance of farmers properly so called, “who cultivated the land with their own stock, paying a rent certain to the landlord” (WN, III. ii. 14).

As a result of these two trends, the great proprietors slowly lost their authority, until a situation was reached where “they became as insignificant as any substantial burgher or tradesman in a city” (WN, III. iv. 15). Smith was able to conclude:

commerce and manufactures gradually introduced order and good government, and with them, the liberty and security of individuals, among the inhabitants of the country, who had before lived almost in a continual state of war with their neighbours, and of servile dependency upon their superiors. This, though it has been the least observed, is by far the most important of all their effects. Mr. Hume is the only writer who, so far as I know, has hitherto taken notice of it (WN, III. iv. 4).

The argument as a whole provides one of the most dramatic examples of Smith’s doctrine of unintended social outcomes (WN, III. iv. 17). The historical analysis of the third book of WN is highly polished in part because Smith perceived that it could be presented as a model and in part because the argument had been rehearsed over many years. But the lectures add a further dimension. The treatment of “public jurisprudence” sets out to provide a philosophical or scientific account of developments which began in Athens and end in modern Europe. But within this broad sweep, more and more attention is given to what was in effect a “Historical View of the English Government”—significantly, the title of John Millar’s major work, first published in 1786.

Attention was drawn to the nature of the English constitution and the claims to liberty, an argument which is conveniently summarized in LJ(A) (iv. 165 – v. 15). Smith drew on this analysis in WN when giving attention to the “admirable” structure of the courts in England, and to the importance of a separation of powers:

In order to make every individual feel himself perfectly secure in the possession of every right which belongs to him, it is not only necessary that the judicial should be separated from the executive power, but that it should be rendered as much as possible independent of that power (WN, V. i. b. 25).

In the same way, Smith drew attention to the need for, and dangers of, a standing army, while indicating that in England a solution close to the ideal had been found where: “the military force is placed under the command of those who have the greatest interest in the support of the civil authority” (WN, V. i. a. 41).

Equally important was the gradual shift in the balance of power which had elevated the House of Commons to a superior degree of influence as “an assembly of the representatives of the people who claim the sole right of imposing taxes” (WN, IV. vii. b. 51). This was the system which had been “perfected by the revolution” (WN, IV. v. b. 43), and which could only be fully understood by reference to underlying economic trends. Yet Smith insisted that England alone had escaped from absolutism (LJ(A), iv. 168), a circumstance which he attributed to the fact that a solution had been found to the Scottish problem, to the natural fertility of the soil, and to Britain’s position as an island. Smith added to this list the peculiarities of sovereigns, such as Elizabeth I, who, being childless, sold off crown lands and thus weakened the position of her successors (LJ(A), iv. 171). He also drew attention to the character of the Stuart kings, a family which “were set aside for excellent reasons” at the time of the Revolution (LJ(B), 82).

But Smith was aware of the fact that England was not unique, that her institutions had been deliberately exported to the American colonies in a more republican form, thus short-circuiting the historical process and contributing to a rapid rate of economic development (WN, IV. vii. b. 51) in the West.

Expediency (Economics). As Smith moved to the last section of his course, his students would be well aware of the relevance of the materials just considered. His treatment of the stage of commerce makes it clear that the usual features of dependence and subordination would be found in this, as in all other, types of social organization. But here wealth only commands respect and thus deference (TMS, I. iii. 2. 3), while dependence relates to the forces of the market rather than to individuals. In this context: “Each tradesman or artificer derives his subsistence from the employment, not of one, but of a hundred or a thousand different customers. Though in some measure obliged to them all, he is not absolutely dependent upon any one of them” (WN, III. iv. 12). The stage of commerce is one where goods and services command a price, and where the “great commerce of every civilized society, is that carried on between the inhabitants of the town and those of the country” (WN, III. i. 1).

Smith’s students would also be aware that many of the psychological judgements which Smith deployed in TMS were peculiarly relevant to a situation where the institutional impediments to economic growth had been largely removed. It was in this context that he drew attention to the deception involved in the pursuit of wealth, a deception which “rouses and keeps in continual motion the industry of mankind” (TMS, IV. 1. 10). In another notable passage, which draws upon the analogy of the Invisible Hand, Smith drew attention to the fact [that] the “rich,” in expending their surpluses, contribute “to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants” (TMS, IV. 1. 10).

But perhaps the most striking passages are those in which the reader is reminded of the proposition that self-interested actions, including economic actions, have a “social” reference. From whence, Smith enquired, “arises that emulation which runs through all the different ranks of men, and what are the advantages which we propose by that great purpose of human life which we call bettering our condition?” He answered: “To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation” (TMS, I. iii. 2. 1). Smith went further in suggesting that a person “appears mean-spirited” who does not pursue the “more extraordinary and important objects of self-interest,” contrasting the “man of dull regularity” with the “man of enterprise” (TMS, III. 6. 7).

Later in the argument Smith stated that men tend to approve of the means adopted to attain the ends of ambition. Hence “that eminent esteem with which all men naturally regard a steady perseverance in the practice of frugality, industry and application, though directed to no other purpose than the acquisition of fortune.” In a further passage Smith was to argue that it “is the consciousness of this merited approbation and esteem which is alone capable of supporting the agent in this tenour of conduct,” since normally the “pleasure which we are to enjoy ten years hence interests us so little in comparison with that which we may enjoy today” (TMS, IV. i. 2. 8).

Economic Theory

Smith’s writings on economics (apart from two fragments on the division of labour, styled FA and FB in the Glasgow edition) are contained in the lecture notes for 1762/3 and 1763/4 together with the document first discovered by W.R. Scott and described by him as an “Early Draft” of WN (Scott, 1937). The first set of lectures is less complete than the second, and omits the discussion of Law’s Bank, interest, exchange and the causes of the slow progress of opulence. On the other hand, those topics which are covered in LJ(A), and which correspond to sections 1–12 of Part 2 in Cannan’s edition of LJ(B) are typically handled with much more elaboration. LJ(B) is not only more complete, at least in terms of coverage, but also more highly finished.

Each version of Smith’s early analysis shows an interest in major themes, which are developed in an order which owe much to Hutcheson (Scott, 1900, ch. 11), most notably the discussion of the division of labour and its implications, and the treatment of price and allocation. Smith departs from Hutcheson, and discloses a debt to Hume, in developing a third topic; namely, the critique of the mercantile “fallacy” (Stewart, IV. 24).

But the later work reveals a smooth, progressive, analytical development, as compared to LJ. In WN the treatment of the division of labour assumes its most elaborate form, while the theory of price features for the first time a clear distinction between factors of production (land, labour, capital) and categories of return (rent, wages, profit). These distinctions enabled Smith to give new meaning to his earlier grasp of the general interdependence of economic phenomena and to proceed to an account of a macroeconomic model which owed much to the teaching of Quesnay. Although some commentators have suggested that Smith’s treatment of physiocratic teaching in WN (IV. ix) was slighting, the fact remains that his assessment of the contribution of the school accurately reflects its purpose and provides details of the more sophisticated model associated with “revisionists” such as Turgot (Meek, 1962). There is no reason to doubt the truth of Dugald Stewart’s assertion that “the intimacy in which he lived with some of the leaders of that sect, could not fail to assist him in methodizing and digesting his speculations” (Stewart, III. 5). Stewart also noted that “If he had not been prevented by Quesnay’s death, Mr. Smith once had an intention (as he told me himself) to have inscribed to him his ‘Wealth of Nations’” (Stewart, III. 12). Stewart also recorded that the division between rent, wages and profit may have originally been suggested to Smith by his old friend James Oswald (Works, 1856, ix. 6).

Division of labour. Although Smith’s model, in its post-physiocratic form, has several distinct elements, the feature on which he continued to place most emphasis was the division of labour. In terms of the content of the model outlined in the previous section, a division of labour is of course implied in the existence of distinct sectors or types of productive activity. But Smith also emphasized the fact that there was specialization by types of employment, and even within each employment. To illustrate the basic point, Smith chose the celebrated example of the pin, a very “trifling manufacture” which none the less required some eighteen distinct processes for its completion.

Smith was at pains to point out that the division of labour (by process) helped to explain the relatively high productivity of labour in modern times—a phenomenon which he ascribed to the increase in “dexterity” which inevitably results from making a single, relatively simple operation “the sole employment of the labourer”; to the saving of time which would otherwise be lost “in passing from one species of work to another”; and to the associated use of machines which “facilitate and abridge labour, and enable one man to do the work of many” (WN, I. i. 6–8). Although Smith was later to claim that agriculture was the most productive area for investment, he pointed out that the scope for the division of labour was more limited in this field than in manufactures (WN, I. i. 4; see below, p. lines 1230–33).

Four important points followed. First, Smith associated the division of labour with the process of invention (technical change):

A great part of the machines made use of in those manufactures in which labour is most subdivided, were originally the inventions of common workmen, who, being each of them employed in some very simple operation, naturally turned their thoughts towards finding out easier and readier methods of performing it (WN, I. i. 8).

He also drew attention to the contribution of the “makers of machines,” and to the work of

those who are called philosophers or men of speculation, whose trade it is, not to do any thing, but to observe every thing; and who, upon that account, are often capable of combining together the powers of the most distant and dissimilar objects. In the progress of society, philosophy or speculation becomes, like every other employment, the principal or sole trade and occupation of a particular class of citizens (WN, I. i. 9).

Secondly, Smith argued that the division of labour is limited only by the extent of the market (WN, I. iii), drawing attention in this context to the importance of the means of communications, such as good roads, and of access both to the sea and to navigable rivers. The latter point bears directly on Smith’s historical analysis (see above, p. lines 458); the former was taken up in his treatment of public works (see below, p. lines 1445–5 [sic]). The same argument was to be developed in terms of Smith’s plea for freedom of trade (see below, p. lines 1305) and serves as a reminder that the division of labour would both contribute to, and be sustained by, the process of economic growth (which is analysed in WN, II). Thirdly, Smith contended that the institution of the division of labour helped to explain not only the enormous increase in the productivity of labour in modern times, but also an improvement in the level of material welfare of such an order that the accommodation of the “frugal peasant” now “exceeds that of many an African king, the absolute master of the lives and liberties of ten thousand naked savages” (WN, I. i. 11). Smith also observed that the consumer who purchases a single commodity acquires, in effect, the separate outputs of a “great variety of labour” (WN, I. i. 11). “The woollen coat, for example, which covers the day labourer, as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen” (WN, I. i. 11).

However, the aspect of this discussion which is most immediately relevant is the light it throws on the necessity of exchange. As Smith observed, once the division of labour is established, our own labour can supply us with only a very small part of our wants. He thus noted that even in the barter economy the individual can best satisfy the whole range of his needs by exchanging the surplus part of his own production, receiving in return the products of others. Where the division of labour is thoroughly established, it is then to be expected that each individual is in a sense dependent on his fellows, and that “Every man thus lives by exchanging, or becomes in some measure a merchant” (WN, I. iv. 1).

Smith argued, indeed, that:

As it is by treaty, by barter, and by purchase, that we obtain from one another the greater part of those mutual good offices which we stand in need of, so it is this same trucking disposition which originally gives occasion to the division of labour (WN, I. ii. 3).

Value. These observations brought Smith directly to the problem of value, and it is noteworthy that in order to simplify the analysis he used the analytical (as distinct from the historical) device of the barter economy.

In dealing with the rate of exchange, Smith argued that “the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another” (WN, I. vi. 1). Thus he suggested that if it takes twice the labour to kill a beaver than it does to kill an deer, then “one beaver should naturally exchange for or be worth two deer.” This is one way of looking at the problem of exchange value, but Smith seems to have treated it, not as an end in itself, but as a means of elucidating those factors which govern the value of the whole stock of goods which the individual creates, and which it is proposed to use in exchange.

Looking at the problem in this way, Smith went on to argue that:

The value of any commodity … to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities (WN, I. v. 1).

Smith’s meaning becomes clear when he remarks that the exchangeable value of a stock of goods must always be in proportion to

the quantity … of other men’s labour, or, what is the same thing, of the produce of other men’s labour, which it enables him to purchase or command. The exchangeable value of everything must always be precisely equal to the extent of this power (WN, I. v. 3; italics supplied).

In other words, Smith is here arguing that the real value of the goods which the workman has to dispose of (in effect, his income) must be measured by the quantity of goods which he receives once the whole volume of (separate) exchanges has taken place.

Now, if, as Smith suggested, the rate of exchange between goods is always equal to the ratio of the labour embodied in them, then it follows that the labour embodied in the stock of goods used in exchange must be equal to the labour embodied in the goods received. The argument has two important features. First, Smith suggests that in the barter economy, the labour which the individual expends, and which is embodied in the goods he creates, must exchange for, or command, and equal quantity. In short, labour embodied equals labour commanded. But it is also evident, in the modern economy, that labour is no longer the sole factor of production, and that in “this state of things, the whole produce of labour does not always belong to the labourer” (WN, I. vi. 7). The equality between labour embodied and labour commanded appears to be relevant to the barter economy and to no other.

A clear difference between the barter and modern economies is to be found in the fact that, while in the former, goods are exchanged for goods, in the latter, goods are exchanged for a sum of money, which may then be expended in purchasing other goods. Under such circumstances the individual, as Smith saw, tends to estimate the value of his receipts (received in return for undergoing the “fatigues” of labour) in terms of money rather than in terms of the quantity of goods he can acquire by virtue of his expenditure. But Smith was at some pains to insist that the real measure of our ability to satisfy our wants is to be found in “the money’s worth” rather than the money, where the former is determined by the quantity of products (labour “commanded”) which either individuals or groups can purchase. Smith went on to distinguish between the nominal and the real value of income, pointing out that if the three original sources of revenue in modern times are wages, rent and profit, then the real value of each must ultimately be measured “by the quantity of labour which they can, each of them, purchase or command” (WN, I. vi. 9).

The determinants of price. Smith’s emphasis on exchange also focused attention on the issue of demand, which had already been elaborated in TMS, most notably in Part IV (“Of the beauty which the appearance of UTILITY bestows upon all the productions of Art”). In LJ Smith contrasted the demand for commodities of immediate use, such as those related to subsistence and shelter, with a desire for refinement which was based on the “delicacy” of body and the “much greater delicacy” of mind (LJ(B), 208; cf. LJ(A), iv. 1–30). In this connection, he drew attention to man’s “taste of beauty, which consists chiefly in the three following particulars, proper variety, easy connection and simple order,” before going on to note that “These qualities, which are the ground of preference and which give occasion to pleasure and pain, are the cause of the many insignificant demands which we by no means stand in need of” (LJ(B), 209).

The argument is given further point by Smith’s handling of the famous paradox; namely, that the “things which have the greatest value in use (e.g. water) have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange (e.g. diamonds) have frequently little or no value in use” (WN, I. iv. 13).

Smith’s handling of the first part of the problem is based on his recognition that both goods are considered to be “useful.” In the former case (water) a value is placed upon the good because it can be used in a practical way, while in the latter case (diamonds) the good appeals to our “senses,” an appeal which, as Smith observed, constitutes a ground “of preference,” “merit” or “source of pleasure.” He concluded: “The demand for the precious stones arises altogether from their beauty, they are of no use, but as ornaments” (WN, I. xi. c. 32).

At the same time, Smith appreciated that merit (value) is a function of scarcity: “the merit of an object which is in any degree either useful or beautiful, is greatly enhanced by its scarcity” (WN, I. xi. c. 31). Even more specifically, he remarked: “Cheapness is in fact the same thing with plenty. It is only on account of the plenty of water that it is so cheap as to be got for the lifting, and on account of the scarcity of diamonds (for their real use seems not yet to be discovered) that they are so dear” (LJ(B), 205–6). The argument can be extended to the problem of particular commodities in a way which is consistent with the negatively sloped demand curve, which his formal analysis of the determinants of price effectively employs.

On the supply side, Smith assumes the existence of given “ordinary” or “average” rates of wages, profit and rent; rates which may be said to prevail within any given society or neighbourhood, during any given (time) period (WN, I. vii. 1). The assumption is important for three reasons: first, it indicates that in dealing with the problem of price, Smith may be seen to have used the analytical device of a static system. Secondly, it should be noted that these rates determine the supply price of commodities and establish in effect the position of the (horizontal) supply curve. Thirdly, the argument suggests that the price of commodities may be established by “adding up” the component parts of wages, profit and rent.

With these three points forming Smith’s major premises, he proceeded to examine the determinants of price and may be seen to have produced a discussion which involves two distinct but related problems. First, he set out to illustrate those forces which determine the prices of particular commodities (Blaug, 1962, p. 42). Secondly, he appears to have used the analysis as a means of elucidating the phenomenon of general interdependence already hinted at in the Lectures (Hollander, 1973, p. 114).

In dealing with the first aspect of the problem, Smith examined the case of a commodity manufactured by a number of sellers, opening the analysis by confirming the distinction between “natural” and “market price” already established in LJ. Natural price is now defined as that amount which is “neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock … according to their natural rates” (WN, I. vii. 4). Where the natural price prevails, the seller is just able to cover his costs of production, including a margin for “ordinary or average” profit. By contrast, market price is defined as that price which may prevail at any given point in time, being regulated “by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity” (the “effectual demanders”; WN, I. vii. 8). The two “prices” are interrelated, the essential point being that while, in the short run, market and natural price may diverge, in the long run they will tend to coincide. Natural price thus emerges as an equilibrium price, which will obtain when the commodity in question is sold at its cost of production. The latter point may be illustrated by examining the consequences of a divergence between the two prices. For example, if the quantity offered by the seller was less than that which the consumers were prepared to take at a particular (natural) price, the consequence would be a competition among consumers to procure some of a relatively limited stock. Under such circumstances, Smith argued that the “market” will rise above the “natural” price, the extent of the divergence being determined by “the greatness of the deficiency” and varying “according as the acquisition of the commodity happens to be of more or less importance” to the buyer (WN, I. vii. 9). In making the latter point, Smith took note of the fact that where a relative shortage occurs of goods which are “necessaries” of life, the extent of the divergence between the two prices (in effect the demand and supply prices) would be greater than that which would occur in other cases (for example, luxuries).

Under such circumstances, the price received by the seller must exceed the natural price (cost of production), with the result that rates of return accruing to factors in this employment (notably wages and profit) also rise above their “ordinary” level. The consequence of such a divergence between the returns paid in a particular employment and the “natural” rates prevailing must then be an inflow of resources to this relatively profitable field, leading to an expansion in the supply of the commodity, and a return to that position where it is sold at its natural price. Given a relative shortage of the commodity in the market, Smith concluded: “The quantity brought thither will soon be sufficient to supply the effectual demand. All the different parts of its price will soon sink to their natural rate, and the whole price to its natural price” (WN, I. vii. 14). In short, the “natural price” emerges as the equilibrium or “central” price “to which the prices of all commodities are continually gravitating” (WN, I. vii. 15).

The first stage of the discussion establishes that in the case of any one commodity, equilibrium will be attained where the good is sold at its natural price, and where each of the (relevant) factors is paid for at its natural rate. It is evident that if this process, and this result, holds good for all commodities taken separately, it must also apply to all commodities “taken complexly,” at least where a competitive situation prevails. Over the whole economy, a position of equilibrium would be attained where each different type of good is sold at its natural price, and where each factor in each employment is paid at its natural rate. The economy can then be said to be in a position of “balance,” since where the above conditions are satisfied there can be no tendency to move resources within or between employments. Where a position of “balance” is disturbed (for example, as a result of changes in tastes) it will naturally tend to be re-established as a result of (simultaneous) adjustments in the factor and commodity markets. Departure from, and reattainment of, a position of equilibrium depends upon the essentially self-interested actions and reactions of consumers and producers. Smith’s treatment of price and allocation thus provides one of the best examples of his emphasis on “interdependence” and a further example of his thesis of the Invisible Hand.

The Natural Rates of Factor Payment

Smith’s theory of price was built upon the assumption of given rates of factor payment. His next task was to elucidate the forces which determine the level of (“ordinary or average”) rates of return during any given time period, or over time. He applied the simple “demand and supply” type of analysis just considered, while taking pains to differentiate between different types of factor payment (WN, I. vi).

Wages constitute payment for the use of the factor labour. The payment is made by those classes who require the factor (undertakers, farmers) and accrues to those who effectively sell their labour power. The process of wage determination may then be viewed as a kind of bargain or contract (WN, I. viii. 11) where the balance of advantage generally lies with the “masters”; the reason being that while contemporary legislation permitted their “combinations,” it prevented those of the workers. But Smith also pointed out that the bargaining strength of the two parties would itself be affected by demand and supply relationships, irrespective of legal privileges (WN, I. viii. 17).

Wage rates may be relatively high or low, depending on the available supply of labour and the size of the fund (or capital stock) available for its purchase. Smith did not in fact set out to define some upper limit for wages, but he did suggest that the lowest limit, in the long term, must be determined by the needs of subsistence (WN, I. viii. 15). The importance of the “subsistence wage” lies in the fact that it constitutes the long-run supply price of labour, the argument being in effect that over time labour may be produced at constant cost, leading to the conclusion that the subsistence wage could be regarded as a kind of “natural” or equilibrium rate. Smith made use of three cases to illustrate an argument which is analogous to the previous treatment of equilibrium price.

In a position of long-run equilibrium the demand for, and supply of, labour must be such that the workforce is in receipt of a subsistence wage. Under such circumstances, a position of equilibrium is established in the sense that there can be no tendency for population to increase or diminish, a condition which will obtain so long as there is no change in the size of the wages fund. This is Smith’s example of the stationary state, as illustrated by the experience of China (WN, I. viii. 24). Secondly, Smith examined a case where there is a fall in the demand for labour either in any one year or continuously over a number of years. Under such circumstances the actual wage rate must fall below the subsistence rate, resulting in a fall in population until the level is such as to permit subsistence wages to be paid. This example represents Smith’s “declining” state, the cases cited being Bengal and certain East Indian colonies; areas where the decline in the wages fund had led to want, “famine and mortality,” until “the number of inhabitants … was reduced to what could easily be maintained by the revenue and stock which remained” (WN, I. viii. 26).

In the “advancing state” an increase, or series of (annual) increases, in the size of the wages fund causes rates in excess of the subsistence level to be paid at least for as long as it takes to increase the level of population; an increase which would inevitably follow from the higher standard of living involved (WN, I. viii. 40). Smith also pointed out that the feature of the “advancing state” would be a continuous improvement in the demand for labour, thus making it possible for high wage rates to be paid over a number of years, and at least for as long as the rate of increase in the demand for labour exceeded the rate of increase in supply. Smith considered the case of North America to be a good example of the trend, but also that many European countries, including Great Britain, showed the same tendency, albeit to a lesser degree (WN, I. viii. 22). All three cases illustrate the same basic principle; namely, that the demand for men, “like that for any other commodity, necessarily regulates the production of men” (WN, I. viii. 40).

Profit was not considered by Smith to be the reward payable for undertaking the managerial function of “inspection and direction” but rather as the compensation for the trouble taken, and the risks incurred, in combining the factors of production (WN, I. vi. 5). The profits which accrue to individual producers will be affected by the selling price of the commodity and its cost of production. Profits are thus likely to be particularly sensitive to changes in the direction of demand, together with the “good or bad fortune” of rivals and customers; facts which make it difficult to speak of an “ordinary or average” rate of return (WN, I. ix. 3). However, Smith did suggest that the rate of interest would provide a reasonably accurate index of profit levels at any one time and over time, basically on the ground that the rate payable for borrowed funds would reflect the profits to be gained from their use: “It may be laid down as a maxim, that wherever a great deal can be made by the use of money, a great deal will commonly be given for the use of it; and that wherever little can be made by it, less will commonly be given for it” (WN, I. ix. 4).

At least as broad generalization, Smith felt able to suggest that the rate of profit accruing at any one point in time (other things remaining equal, and with wage rates given) would be determined by the quantity of stock (capital) available, taken in conjunction with the volume of business to be transacted by it, or the extent of the outlets for profitable investment. It thus followed that over time the rate of profit will tend to fall, partly in consequence of the gradual increase of stock, and partly because of the increasing difficulty of finding “a profitable method of employing any new capital.” The “diminution of profit is the natural effect of … prosperity” (WN, I. ix. 10), although, as Smith pointed out, in advancing states the tendency for profits to fall might be reversed or halted, due to the acquisition of new investment outlets or of new territories (WN, I. ix. 12).

The basic points are clear: in the long term the tendency is for profits (like wages) to fall. At any one point in time (say, a single year), the “ordinary or average” rate of profit prevailing must be a function of the quantity of stock and the “proportion of business” to which it can be applied. Smith made an important qualification to the latter point when he indicated that even where the quantity of stock remains the same (say, in two different time periods), other things remaining equal, the rate of profit will also be related to the prevailing wage rate. If labour is relatively abundant in relation to a given capital stock (that is, the wages fund), the rate of profit will be higher, and wage rates lower, than they would be where labour was relatively scarce.

In the following chapter Smith added a further important dimension to his treatment of wages and profits. The point follows directly from his recognition (following Hutcheson) of the fact that employments differ qualitatively. As Smith put it, “certain circumstances in the employments themselves … either really, or at least in the imaginations of men, make up for a small pecuniary gain in some, and counter-balance a great one in others” (WN, I. x. a. 2). He noted, for example, that wage rates would tend to vary between different types of employment according to the difficulty of learning the trade, the constancy of employment and the degree of trust involved. Similarly, he observed that both wages and profits would vary with differences in the agreeableness of the work, and with the probability of success in particular fields. He concluded that in a competitive environment, “The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighbourhood, be either perfectly equal or continually tending to equality” (WN, I. x. 1).

Rent is defined as the “price paid for the use of land” (WN, I. xi. a. 1), a price paid because land is of itself productive, part of the property of individuals and (presumably) scarce. Smith argued that rent constitutes a pure surplus; the proprietors of land emerge as “the only one of the three orders whose revenue costs them neither labour nor care, but comes to them, as it were, of its own accord” (WN, I. xi. p. 8). Moreover, Smith suggested that rent payments are somewhat akin to a “monopoly price” at least in the broad sense that they are generally the highest which can be got in the “actual circumstances of the land” (WN, I. xi. a. 1). Smith recognized that rent payments would vary with both the fertility and the situation of the land involved.

Smith generally took the view that land used for the production of human food would always yield a rent, and indeed computed that rent would be of the order of one-third of the gross produce. Moreover, he suggested that in the long term, rent payments would tend to increase, at least absolutely, due to the increased use of the available stock (of land) which the growth of population inevitably involves. “The extension of improvement and cultivation tends to raise it directly. The landlord’s share of the produce necessarily increases with the increase of the produce” (WN, I. xi. p. 2). He added that the real value of the landlord’s receipts would also tend to increase over time, since all “those improvements in the productive powers of labour, which tend directly to reduce the real price of manufactures, tend indirectly to raise the real rent of land” (WN, I. xi. p. 4).

Two aspects of Smith’s argument are of particular importance in the present context. First, the analysis serves to suggest that at any point in time, or during any given annual period, rent payments will be a function of the proportion (of the fixed stock of land) used, where the latter is in turn a function of the level of population. Secondly, Smith’s argument indicates that during any given annual period rent payments will be related not only to the fertility of the soil but also to the prevailing rates of wages and profit (WN, I. xi. a. 8).

A Macroeconomic Model

It is apparent that there is a “static” element in Smith’s treatment of distribution, linking it to the theory of price. There is also a dynamic element, in the sense that Smith was partly concerned with long-run trends in rates of return, treating factors as flows rather than stocks.

The first theme was to be continued in terms of Smith’s treatment of period analysis in the physiocratic manner; the second is relevant in the context of the discussion of growth.

Period analysis. Smith’s analysis of the “circular flow” may be seen as a direct development of results already stated in connection with the theory of price. Costs of production are incurred by those who create commodities, thus providing individuals with the means of exchange. It follows that if the price of each good (in a position of equilibrium) comprehends payments made for rent, wages and profit, according to their natural rates, then “it must be so with regard to all the commodities which compose the whole annual produce of the land and labour of every country, taken complexly” (WN, II. ii. 2). Smith concluded: “The whole price or exchangeable value of that annual produce, must resolve itself into the same three parts, and be parcelled out among the different inhabitants” (ibid.). Smith thus established that there must be a relationship between aggregate output and aggregate income: “The gross revenue of all the inhabitants of a great country, comprehends the whole annual produce of their land and labour” (WN, II. ii. 5).

The three major socio-economic groups have distinctive and particular roles. The proprietors of land are typically associated with habits of expense and conspicuous consumption, while wage labour as a group faces the problem of meeting more basic levels of need. It is the “undertakers” who are normally linked with the “principle which prompts to save” (WN, II. iii. 28) and with a willingness to invest in both fixed and circulating capital; categories which are reminiscent of physiocratic teaching.

Fixed capital is defined as that portion of savings used to purchase “useful machines” or to improve, for example, the productive powers of land, the characteristic feature being that goods are created, and profits ultimately acquired, by using and retaining possession of the investment goods involved. Circulating capital is that portion of savings used to purchase investment goods other than “fixed” implements, such as labour power or raw materials, the characteristic feature being that goods are produced through temporarily “parting with” the funds so used. Smith also noted that different trades would use different proportions of fixed and circulating capital, and that no fixed capital “can yield any revenue but by means of a circulating capital” (WN, II. i. 25).

The system which Smith described featured the production and use of both investment and consumption goods, but also a demand for services which do not directly contribute to the (annual) output of commodities (in physical terms) and which thus cannot be said to contribute to that level of income associated with it. Smith formally described such labour as “unproductive,” but did not deny that services of this kind were useful. He pointed out that the services of “players, buffoons, opera singers, and musicians” have a certain value because they represent sources of satisfaction to those who pay for them. He also observed that the services provided by governments, such as justice and defence, which are paid for out of taxes, have a value, the reason being that society could not subsist without them. However, all such services are by definition unproductive:

The sovereign … with all the officers both of justice and war who serve under him, the whole army and navy, are unproductive labourers. They are the servants of the publick, and are maintained by a part of the annual produce of the industry of other people (WN, II. iii. 2).

Smith then proceeded to develop a model of the “circular flow” which owed much to physiocratic analysis, while giving his account a distinctive style by dividing the stock of society into a number of components. These are, first, that part of total stock which is reserved for immediate consumption, and which is held by all consumers (undertakers, labour and proprietors). The characteristic feature of this part of the total stock is that it affords no revenue to its possessors since it consists in “the stock of food, cloathes, household furniture, etc. which have been purchased by their proper consumers, but which are not yet entirely consumed” (WN, II. i. 12).

Secondly, there is that part of the total stock which may be described as “fixed capital” and which will again be distributed between the various groups in society. This part of the stock, Smith suggested, is composed of the “useful machines” purchased in preceding periods and held by the undertakers engaged in manufacture, and the quantity of useful buildings and of “improved land” in the possession of the “capitalist” farmers and the proprietors, together with the “acquired and useful abilities” of all the inhabitants (WN, i. 13–17), that is, human capital.

Thirdly, there is that art of the total stock which may be described as “circulating capital” and which again has several components. These include the quantity of money necessary to carry on the process of circulation (WN, II. iii. 23); the stock of provisions and other agricultural products which are available for sale during the current period, but which are still in the hands of either the farmers or merchants; the stock of raw materials and work in process, which is held by merchants, undertakers or those capitalists (i.e. undertakers) engaged in the agricultural sector (including mining etc.). Finally, there is the stock of manufactured goods (consumption and investment) created during a previous period, but which remain in the hands of undertakers and merchants at the beginning of the period examined (WN, II. i. 19–22).

The logic of the process can best be represented by distinguishing between the activities involved. Suppose, at the beginning of the time period in question, that the major capitalist groups possess the total net receipts earned from the sale of products in the previous period, and that the undertakers engaged in agriculture open by transmitting the total rent due to the proprietors of land, for the use of that factor. The income thus provide enables the proprietors to make necessary purchases of consumption goods in the current period, thus contributing to reduce the stocks of such goods available for sale. The undertakers (capitalists) engaged in both sectors, together with the merchant groups, transmit to wage labour the content of the wages fund, thus providing this socio-economic class with an income which can be used in the current period. The undertakers (or entrepreneurs) engaged in agriculture and manufactures purchase consumption and investment goods from each other (through the medium of retail and wholesale merchants), thus generating a series of expenditures which link the two sectors. The process of circulation may be seen to be completed by the purchases made by individual undertakers within their own sectors. These purchases will include consumption and investment goods, thus contributing still further to reduce the stocks of commodities which formed part of the circulating capital of the society at the beginning of the period (i.e. year).

Given these points, the working of the system can be represented in terms of a series of flows whereby money (accruing in the form of rent, wages and profit) is exchanged for commodities. The consumption goods withdrawn from the existing stock may be entirely exhausted during the current period, used to increase the stock “reserved for immediate consumption,” or to replace more durable goods which had reached the end of their lives in the course of the same period. Similarly, undertakers may add to their stocks of raw materials and of fixed capital, or replace machines which had finally worn out in the current period, together with the materials which had been exhausted. Looked at in this way, the “circular flow” may be seen to involve purchases which withdraw goods from the circulating capital of society, a process which is matched by a simultaneous process of replacement by virtue of current production of materials and other commodities.

Two additional matters should be noted before going further. In discussing the working of the “flow,” Smith had in effect introduced a treatment “Of the Different Employment of Capital.” As he noted, in a passage reminiscent of Turgot’s Reflections (sect. LXXXIII), capitals may be employed in agriculture, manufacture or in the wholesale and retail trades: “Each of those four methods of employing a capital is essentially necessary either to the existence or extension of the other three, or to the general conveniency of the society” (WN, II. v. 3).

Secondly, he noted that profit levels in each area must be seen to be interrelated, with due allowance made for the advantages and disadvantages which attend the different employments of capital (WN, III. i. 3; cf. I. x. a). Smith also pointed out that profits in the different employments of stock would tend to equality as a result of the movement of resources between fields. In a passage which recalls the earlier treatment of allocation, Smith noted that “The consideration of his own private profit, is the sole motive which determines the owner of any capital to employ it either in agriculture, in manufactures, or in some particular branch of the wholesale or retail trade” (WN, II. v. 37).

Dynamics. In choosing the working of the economy during a given time period such as a year, Smith gave his model a broadly short-run character, albeit one which includes a time dimension. But he did not seek to formulate equilibrium conditions for the model as Quesnay had done in the Analyse, at least in the sense that he did not try to develop an argument which used specific assumptions of a quantitative kind. Smith’s lack of concern with “macro-static” equilibrium was to some extent announced by the fact that he made allowance for the problem of the different rates at which goods may be used up.

Nor did Smith suggest that the level of output attained during any given period would be exactly sufficient to replace the goods which had been exhausted during its course. On the contrary, he argued that levels of output attained in any time period could well exceed previous values. Smith’s main concern was with economic growth:

The annual produce of the land and labour of any nation can be increased in its value by no other means, but by increasing either the number of its productive labourers, or the productive power of those labourers who had before been employed (WN, II. iii. 32).

Both sources of increased output required “additional capital” devoted either to increasing the size of the wages fund or to the purchase of “machines and instruments which facilitate and abridge labour” (ibid.). Net savings are the key to the process:

Parsimony, by increasing the fund which is destined for the maintenance of productive hands, tends to increase the number of those hands whose labour adds to the value of the subject upon which it is bestowed. It tends therefore to increase the exchangeable value of the annual produce of the land and labour of the country. It puts into motion an additional quantity of industry, which gives an additional value to the annual produce (WN, II. iii. 17).

Net savings, where used for “productive” purposes, are likely to generate an increase in the level of output and income in subsequent periods. Where there are opportunities for investment, the process of capital accumulation and economic growth can be seen to be self-generating, indicating that Smith’s version of the “flow” is to be regarded not as a “circle” but as a spiral of constantly expanding dimensions. It was in this connection that Smith advanced a proposition that was to figure prominently in the formulation of the classical system later to be associated with J.B. Say and James Mill; namely, that what is “annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different set of people” (WN, II. iii. 18). This echoes an earlier statement: “A man must be perfectly crazy who, where there is tolerable security does not employ all the stock which he commands” (WN, II. i. 30).

The treatment of growth was further supported by reference to the division of labour, which suggested that technical change was endogenous and continuous (see above, p. lines 638–352 ff). While Smith in effect made the point that the economic process is likely to be subject to increasing returns, it is doubtful if he fully appreciated the rate of technical change currently taking place. But he also expressed interest in other elements which could affect the rate of growth, all of which relate to the argument so far.

Smith noted the importance of the level of resources needed to maintain a fixed capital (WN, II. ii. 7) and drew attention to the effect of commercial failure, which always tends “to diminish the funds destined for the maintenance of productive labour” (WN, II. iii. 26). The size of the government sector was also important, since the “whole, or almost the whole publick revenue, is in most countries employed in maintaining unproductive hands” (WN, II. iii. 30).

In the same vein, he drew attention to the significance of “the enormous debts which at present oppress, and will in the long run probably ruin, all the great nations of Europe” (WN, V. iii. 10). Smith noted that the debt in Britain had reached £130 million by 1775 and that some £124 million of the total was funded (WN, V. iii. 46). Quite apart from the associated problem of taxation, Smith was concerned to point out that the practice of funding in effect meant that “a certain portion of the annual produce” was “turned away from serving in the function of a capital, to serve in that of a revenue” (WN, V. iii. 47). The point was a variant on Smith’s basic thesis that the rate of growth must be determined by the extent to which resources are used to support productive as distinct from unproductive labour (WN, II. iii. 3).

Smith further elaborated on the basic point at issue in contending that the rate of growth would be affected by the area of investment to which specific injections of capital were applied. He contended that the main fields of investment which were mentioned in the account of the “flow” would support, directly or indirectly, different quantities of productive labour. The retailer replaces the stock of the merchant from whom he purchases goods, thus supporting a certain quantity of labour even though the retailer himself is the only productive labourer directly employed. The wholesaler replaces the capitals of the farmers and merchants with whom he deals and from “whom he purchases the rude and manufactured produce which he deals in, and thereby enables them to continue their respective trades” (WN, II. v. 10). Both indirectly and directly the merchant supports a larger number of productive hands than the retailer. If the wholesale trade was preferred to the retail, manufactures emerge as still more important since investment in this area would indirectly support a relatively large amount of productive labour by replacing the capitals of those who supply machinery and materials, while at the same time tending directly to employ a relatively significant number of people. But undoubtedly Smith’s preference was for agriculture, a point already established in LJ: “No equal capital puts into motion a greater quantity of productive labour than that of the farmer”—leading to the conclusion that “Of all the ways in which a capital can be employed, it is by far the most advantageous to the society” (WN, II. v. 12).

Smith advanced two additional propositions which seem to follow from the argument just stated. First, he asserted that where the total stock available is insufficient for the purpose of agriculture, manufacture and trade, the rate of growth will be maximized by first concentrating on the former. He believed as a matter of fact that the rate of growth in Europe was lower than it might be and that “agriculture … is almost every where capable of absorbing a much greater capital than has ever yet been employed in it” (WN, II. v. 37). Secondly, he argued that there is a natural sequence of investment: “According to the natural course of things … the greater part of the capital of every growing society is, first, directed to agriculture, afterwards to manufactures, and last of all to foreign commerce” (WN, III. i. 8).

Smith’s theory of accumulation is the dominant theme of the second book and helps to complete the logic of the earlier exposition by clarifying the source of long-run trends in factor payments. Smith’s preoccupation with the long run also helps to explain the focus of WN, I. v., where he was chiefly concerned to establish a measure of value in the context of the discussion of economic welfare. The argument was intended to illustrate the point that the real value of income can only be measured in terms of the quantity of goods or the quantity of labour” (labour embodied) which it enables the individual “to purchase or command” (WN, I. v. 1). Smith also sought to provide a means of measuring the extent to which individuals were better (or worse) off over long periods of time, associating improvements in welfare with “a reduction in the sacrifices required to obtain a slab of real income” (Blaug, 1962, p. 49).

Yet “complete” as it is, there are a number of areas of “tension” in the work, three of which may be mentioned here. Having advanced the thesis regarding the “natural progress of opulence,” Smith went on to assert that “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 introduced all their finer manufactures … and manufactures and foreign commerce, together, have given birth to the principal improvements of agriculture (WN, III. i. 9).

These passages preface the analysis of Book III, which traces the emergence of the stage of commerce and have the remarkable effect of presenting the historical record which had been featured in LJ as being in some sense unnatural.

Similar difficulties surround Smith’s ranking of areas of investment in Book II, a ranking which is employed in the analysis of the relationship with America in order to “demonstrate” that the rate of growth would diverge from that of the mother country. The nature of the relationship with America, Smith contended, had the effect of confining the colonists to the development of primary products (WN, IV. vii. c. 51), while in contrast, the colonial trade of Great Britain had drawn capital from a near market (Europe) and diverted it to a distant market, while forcing a certain amount of capital from a direct to an indirect foreign trade—all with consequent effects on the rate of return, the employment of productive labour and therefore on the rate of economic growth.

Governor Pownall was the first to observe that Smith had not led empirical evidence in support of case (1776, Corr., 369). In recognizing Smith’s reliance on the different productivities of investment, Pownall also noted that “propositions” which had been advanced in Book II were used “in the second part of your work [Book IV] as data; whence you endeavour to prove, that the monopoly of the colony trade is a disadvantageous commercial institution” (Corr., 354). Smith acknowledged Pownall’s perceptive analysis (letter 182, dated London, 1777) and later wrote to Andreas Holt (Corr., letter 208, dated October 1780) that he had met the Governor’s objections in the second edition of WN. Far from so doing, Smith added a passage to the third edition of 1783, the year of peace with America, which suggests that it is unnecessary to “say any thing further, in order to expose the folly of a system, which fatal experience has now sufficiently exposed” (WN, IV. vii. 15).

A third area of criticism is revealed in David Ricardo’s Principles of Political Economy and Taxation (1817). Ricardo sought to generalize the labour embodied theory of value, which Smith had confined to the primitive state where labour is the only factor of production (WN, I. vi. 7), combining this with a clear statement of a theory of differential rent, which effectively removed the ambiguities in Smith’s treatment. It is now well known that he also deployed these areas of analysis together with Smith’s population mechanism in producing a formal account of the progression from the “advancing” to the “stationary” state, at which Smith had also hinted.


Smith’s analytical apparatus, allied to his judgement with respect to the probable trends of the economy, led him to advance the claims of economic liberty; claims which had already featured in LJ and which date back to his days in Edinburgh (Stewart, IV. 25). The argument is repeated in WN, where Smith called upon the sovereign to discharge himself from a duty:

in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interests of the society (WN, IV. ix. 51).

The statement is familiar, yet conceals a point of great significance; namely, that while the institutions of the exchange economy are consistent with the emergence of personal freedom (for example, under the law), they are not of themselves sufficient to establish what Smith described as the “system of natural liberty” (ibid.). In fact, one of the most important functions of government is that of identifying and removing impediments to the effective working of the economy. Smith drew attention, for example, to the adverse effects of the statute of apprenticeship, and of corporate privileges. Regulations of this kind were criticized on the ground that they were both impolitic and unjust: unjust in that controls over qualification for entry to a trade were a violation “of this most sacred property which every man has in his own labour” (WN, I. x. c. 12) and impolitic in that such regulations are not of themselves sufficient to guarantee competence. But Smith particularly emphasized that the regulations in question would adversely affect the working of the market mechanism. The “statute of apprenticeship obstructs the free circulation of labour from one employment to another, even in the same place. The exclusive privileges of corporations obstruct it from one place to another, even in the same employment” (WN, I. x. c. 42). He also commented on the problems presented by the Poor Laws and the Laws of Settlement (WN, IV, ii. 42), which further restricted the free movement of labour from one geographical location to another.

Smith objected to positions of privilege, such as monopoly power, which he regarded as creations of the civil law. The institution was again represented as impolitic and unjust: unjust in that a monopoly position is one of privilege and advantage, and therefore “contrary to that justice and equality of treatment which the sovereign owns to all the different orders of his subjects”; impolitic in that the prices at which goods so controlled are sold are “upon even occasion the highest that can be got” (WN, I. vii. 27). He added that monopoly is “a great enemy to good management” (WN, I. xi. b. 5) and that the institution had the additional defect of restricting the flow of capital to the trades affected as a result of the legal barriers to entry which were involved.

It is useful to distinguish Smith’s objection to monopoly from his criticism of one expression of it; namely, the mercantile system of regulation which he described as the “modern system” of policy, best understood “in our own country and in our own times” (WN, IV. 2). Smith asserted that mercantile policy aimed to secure a positive balance of trade through the control of exports and imports, a policy whose “logic” was best expressed in terms of the Regulating Acts of Trade and Navigation, which currently determined the pattern of trade between Great Britain and her colonies and which were designed to create in effect a self-sufficient Atlantic Economic Community.

Smith objected to current policies of the type described on the ground that they artificially restricted the market and thus damaged opportunities for economic growth. It was Smith’s contention that such policies were liable to that general objection which may be made to all the different expedients of the mercantile system, “the objection of forcing some part of the industry of the country into a channel less advantageous than that in which it would run of its own accord” (WN, IV. v. a. 24). In WN Smith placed more emphasis on interference with the allocative mechanism than he had done in LJ, where greater attention had been given to the inconsistency which was involved in seeking a positive balance of trade, an argument which relied heavily on Hume’s analysis of the Specie Flow.

While it is difficult to judge the extent to which the claim for economic liberty explains the contemporary reception of WN, it may have been a major factor, at least in Britain (Schumpeter, 1954, p. 185). There can be no doubt that later generations found Smith’s argument (and rhetoric) attractive. The celebrations to mark the fiftieth anniversary of the book showed a wide and continuing acceptance of the doctrines of free trade. In 1876, at a dinner held by the Political Economy Club to mark the centenary of WN, one speaker identified free trade as the most important consequence of the work done by “this simple Glasgow professor,” and predicted that

there will be what may be called a large negative development of Political Economy tending to produce an important beneficial effect; and that is, such a development of Political Economy as will reduce the functions of government within a smaller and smaller compass (Black, 1975, p. 51).

This view still commands wide contemporary support.

There can be no argument with Jacob Viner’s contention that “Smith in general believed that there was, to say the least, a strong presumption against government activity” (Viner, 1928, p. 140). But as Viner also reminded his auditors during the course of the Chicago conference which celebrated the 150th anniversary of the publication of WN, “Adam Smith was not a doctrinaire advocate of laissez-faire. He saw a wide and elastic range of activity for government” (pp. 153–4). A number of examples, all identified by Viner in a classic article, may briefly be reviewed here.

First, Smith was prepared to justify specific policies to meet particular needs as these arose; the principle of intervention ad hoc. He defended the use of stamps on plate and linen as the most effectual guarantee of quality (WN, I. x. c. 13), the compulsory regulation of mortgages (WN, V. ii. h. 17), the legal enforcement of contracts (WN, I. ix. 16) and government control of the coinage. In addition, he supported the granting of temporary monopolies to mercantile groups, to the inventors of new machines and, not surprisingly, to the authors of new books (WN, V. i. e. 30). He further advised governments that where they were faced with taxes imposed by their competitors, retaliation could be in order, especially if such action had the effect of ensuring the “repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods” (WN, IV. ii. 39).

Secondly, Smith advocated the use of taxation, not as a means of raising revenue but as a source of social reform, and as a means of compensating for what would now be described as a defective telescopic faculty. In the name of the public interest, Smith supported taxes on the retail sale of liquor in order to discourage the multiplication of alehouses (WN, V. ii. g. 4) and differential rates on ale and spirits in order to reduce the sale of the latter (WN, V. ii. k. 50). He advocated taxes on those proprietors of land who demanded rents in kind, and on those leases which prescribed a certain form of cultivation. In the same way, Smith argued that the practice of selling a future, for the sake of present, revenue should be discouraged on the ground that it reduced the working capital of the tenant and at the same time transferred a capital sum to those who would use it for the purposes of consumption (WN, V. ii. c. 12) rather than investment which would directly support productive labour.

Smith was well aware, to take a third example, that the modern version of the “circular flow” depended on paper money and on credit; in effect, a system of “dual circulation” involving a complex of transactions linking producers and merchants, and dealers and consumers (WN, II. ii. 88). It is in this context that he advocated control over the rate of interest, to be set in such a way as to ensure that “sober people are universally preferred, as borrowers, to prodigals and projectors” (WN, II. iv. 15). He was also willing to regulate the small note issue in the interests of a stable banking system. To those who objected to such a proposal Smith replied that the interests of the community required it, and concluded that “the obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind [as] the regulations of the banking trade which are here proposed” (WN, II. ii. 94). Although Smith’s monetary analysis is not regarded as amongst the strongest of his contributions, it should be remembered that as a witness of the collapse of the Ayr Bank, he was acutely aware of the problems generated by a sophisticated credit structure, and that it was in this context that he articulated a very general principle; namely, that “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; of the most free, as well as of the most despotical” (WN, II. ii. 94).

Fourthly, emphasis should be given to Smith’s contention that a major responsibility of government must be the provision of certain public works and institutions for facilitating the commerce of the society which were “of such a nature, that the profit could never repay the expense to any individual or small number of individuals, and which it, therefore, cannot be expected that any individual or small number of individuals should erect or maintain” (WN, V. i. c. 1). The examples of public works which he provided include roads, bridges, canals and harbours—all thoroughly in keeping with the conditions of the time and with Smith’s emphasis on the importance of transport as a contribution to the effective operation of the market and to the process of economic growth. But although the list is short by modern standards, the discussion is of interest for two main reasons. First, Smith contended that public works or services should only be provided where market forces have failed to do so; secondly, he insisted that attention should be given to the requirements of efficiency and equity.

As Nathan Rosenberg (1960) has pointed out in an important article, Smith did not argue that governments should directly provide relevant services; rather, they should establish institutional arrangements so structured as to engage the motives and interests of those concerned. Smith tirelessly emphasized the point that in every trade and profession “the exertion of the greater part of those who exercise it, is always in proportion to the necessity they are under of making that exertion” (WN, V. i. f. 4); teachers, judges, professors, civil servants and administrators alike.

With regard to equity, Smith argued that public works such as highways, bridges and canals should be paid for by those who use them and in proportion to the wear and tear occasioned—an expression of the general principle that the beneficiary should pay. He also defended direct payment on the ground of efficiency since only by this means would it be possible to ensure that necessary services would be provided where there was an identifiable need (WN, V. i. d. 6).

Yet Smith recognized that it would not always be possible to fund or to maintain public services without recourse to general taxation. In this case he argued that “local or provincial expenses of which the benefit is local or provincial” ought to be no burden on general taxation since “It is unjust that the whole society should contribute towards an expence of which the benefit is confined to a part of society” (WN, V. i. i. 3). However, he did agree that a general contribution would be appropriate in cases where public works benefit the whole society and cannot be maintained by the contribution “of such particular members of the society as are most immediately benefited by them” (WN, V. i. i. 6).

But here again, the main features of the system of liberty are relevant in that they affect the way in which taxation should be imposed. Smith pointed out on welfare grounds that taxes should be levied in accordance with the canons of equality, certainty, convenience and economy (WN, V. ii. b), and insisted that they should not be raised in ways which infringed the liberty of the subject—for example, through the odious visits and examinations of the tax-gatherer. Similarly, he argued that taxes ought not to interfere with the allocative mechanism (as, for example, taxes on necessities or particular employments) or constitute important disincentives to the individual effort on which the effective operation of the whole system depended (for example, taxes on profits or on the produce of land).

Ethics and History

The policy views which have just been considered are closely related to Smith’s economic analysis. Others are only to be fully appreciated when seen against the background of his work on ethics and jurisprudence.

It will be recalled that for Smith moral judgement depends on a capacity for acts of imaginative sympathy, and that such acts can only take place within the context of some social group (TMS, III. i. 3). However, Smith also observed that the mechanism of the impartial spectator might well break down in the context of the modern economy, due in part to the size of the manufacturing units and of the cities which housed them.

Smith observed that in the actual circumstances of modern society, the poor man could find himself in a situation where the “mirror” of society (TMS, III. i. 3) was ineffective. The “man of rank and fortune is by his station the distinguished member of a great society, who attend to every part of his conduct, and who thereby oblige him to attend to every part of it himself.” But the “man of low condition,” while “his conduct may be attended to” so long as he is a member of a country village, “as soon as he comes into a great city, he is sunk in obscurity and darkness. His conduct is observed and attended to by nobody, and he is therefore very likely to neglect it himself, and to abandon himself to every sort of low profligacy and vice” (WN, V. i. g. 12).

In the modern context, Smith suggests that the individual thus placed would naturally seek some kind of compensation, often finding it not merely in religion but in religious sects; that is, small social groups within which he can acquire “a degree of consideration which he never had before” (WN, V. i. g. 12). Smith noted that the morals of such sects were often disagreeably “rigorous and unsocial,” recommending two policies to offset this.

The first of these is learning, on the ground that science is “the great antidote to the poison of enthusiasm and superstition.” Smith suggested that government should institute “some sort of probation, even in the higher and more difficult sciences, to be undergone by every person before he was permitted to exercise any liberal profession, or before he could be received as a candidate for any honourable office of trust or profit” (WN, V. i. g. 14). The second remedy was through the encouragement given to those who might expose or dissipate the folly of sectarian bitterness by encouraging an interest in painting, music, dancing, drama—and satire (WN, V. i. g. 15).

If the problems of solitude and isolation consequent on the growth of cities explain Smith’s first group of points, a related trend in the shape of the division of labour helps to account for the second. In the earlier part of the argument, Smith had emphasized the gain to society at large which arose from improved productivity. But he noted later that this important source of economic benefit could also involve social costs:

In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations; frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose life is spent in performing a few simple operations, of which the effects too are, perhaps, always the same, or very nearly the same, has no occasions to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur (WN, V. i. f. 50).

Smith went on to point out that despite a dramatic increase in the level of real income, the modern worker could be relatively worse off than the poor savage, since in such primitive societies the varied occupations of all men—economic, political and military—preserve their minds from that “drowsy stupidity, which, in a civilized society, seems to benumb the understanding of almost all the inferior ranks of people” (WN, V. i. f. 51). It is the fact that the “labouring poor, that is the great body of the people” will fall into the state outlined that makes it necessary for government to intervene.

Smith’s justification for intervention is, as before, market failure, in that the labouring poor, unlike those of rank and fortune, lack the leisure, means or (by virtue of their occupation) the inclination to provide education for their children (WN, V. i. f. 53). In view of the nature of the problem, Smith’s programme seems rather limited, based as it is on the premise that “the common people cannot, in any civilized society, be so well instructed as people of some rank and fortune” (WN, V. i. f. 54). However, he did argue that they could all be taught “the most essential parts of education … to read, write, and account” together with the “elementary parts of geometry and mechanicks” (WN, V. i. f. 54, 55). Smith added:

The publick can impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education, by obliging every man to undergo an examination or probation in them before he can obtain the freedom in any corporation, or be allowed to set up any trade either in a village or town corporate (WN, V. i. f. 57; italics supplied).

Distinct from the above, although connected with it, is Smith’s concern with the decline of martial spirit, which is the consequence of the nature of the fourth, or commercial, stage. He concluded that:

Even though the martial spirit of the people were of no use towards the defence of the society, yet to prevent that sort of mental mutilation, deformity and wretchedness, which cowardice necessarily involves in it, from spreading themselves through the great body of the people would still deserve the most serious attention of government (WN, V. i. f. 60).

Smith went on to liken the control of cowardice to the prevention of “a leprosy or any other loathsome and offensive disease”—thus moving Jacob Viner to add public health to Smith’s already lengthy list of governmental functions (Viner, 1928, p. 150). Such concerns have enabled Winch (1978) to find in Smith evidence of the language of an older, classical, concern with the problem of citizenship. Others (e.g. see contributions in Hont and Ignatieff, 1983) have located Smith more firmly in the tradition of civic humanism.

The historical dimension of Smith’s work also affects the treatment of policy, noting as he did that in every society subject to a process of transition, “Laws frequently continue in force long after the circumstances, which first gave occasion to them, and which could also render them reasonable, are no more” (WN, III. ii. 4). In such cases Smith suggested that arrangements which were once appropriate but are now no longer so should be removed, citing as examples the laws of succession and entail; laws which had been appropriate in the feudal period but which now had the effect of limiting the sale and improvement of land. The continuous scrutiny of the relevance of particular laws is an important function of the “legislator” (Haakonssen, 1981).

In a similar way, the treatment of justice and defence, both central services to be organized by the government, are clearly related to the discussion of the stages of history, an important part of the argument in the latter case being that a gradual change in the economic and social structure had necessitated the formal provision of an army (WN, V. i. a, b).

But perhaps the most striking and interesting features emerge when it is recalled that for Smith the fourth economic stage could be seen to be associated with a particular form of social and political structure which determines the outline of government and the context within which it must function. It may be recalled in this connection that Smith associated the fourth economic stage with the elimination of the relation of direct dependence which had been a characteristic of the feudal agrarian period. Politically, the significant and associated development appeared to be the diffusion of power consequent on the emergence of new forms of wealth which, at least in the peculiar circumstances of England, had been reflected in the increased significance of the House of Commons.

Smith recognized that in this context government was a complex instrument, that the pursuit of office was itself a “dazzling object of ambition”—a competitive game with as its object the attainment of “the great prizes which sometimes come from the wheel of the great state lottery of British politicks” (WN, IV. vii. c. 75).

Yet for Smith the most important point was that the same economic forces which had served to elevate the House of Commons to a superior degree of influence had also served to make it an important focal point for sectional interests—a development which could seriously affect the legislation which was passed and thus affect that extensive view of the common good which ought ideally to direct the activities of Parliament.

It is recognized in the Wealth of Nations that the landed, moneyed, manufacturing and mercantile groups all constitute special interests which could impinge on the working of government. Smith referred frequently to their “clamourous importunity,” and went so far as to suggest that the power possessed by employers generally could seriously disadvantage other classes in the society (WN, I. x. c. 61; cf. I. viii. 12, 13).

Smith insisted that any legislative proposals emanating from this class:

ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the publick, who have generally an interest to deceive and even to oppress the publick, and who accordingly have, upon many occasions, both deceived and oppressed it (WN, I. xi. p. 10).

He was also aware of the dangers of manipulation arising from deployment of the civil list (LJ(A), iv. 175–6).

It is equally interesting to note how often Smith referred to the constraints presented by the “confirmed habits and prejudices” of the people, and to the necessity of adjusting legislation to what “the interests, prejudices, and temper of the times would admit of” (WN, IV. v. b. 40, 53, and V. i. g. 8; cf. TMS, VI. ii. 2. 16). Such passages add further meaning to the discussion of education. An educated people, Smith argued, would be more likely to see through the interested complaints of faction and sedition. He added a warning and a promise in remarking that:

In free countries, where the safety of government depends very much on the favourable judgment which the people may form of its conduct, it must surely be of the highest importance that they should not be disposed to judge rashly or capriciously concerning it (WN, V. i. f. 61).

The Literature of Science

In contrast to the modern reader, students of Smith’s course in Glasgow would more readily perceive that the different parts into which it fell were important of themselves, and also that they display a certain pattern of interdependence. The ethical argument clearly indicates the manner in which general rules of conduct, including those of justice, emerge and postulates the need for some system of government or magistracy. The treatment of jurisprudence shows the manner in which government emerged and developed through time, while throwing some light on the actual content of the rules of behaviour which were manifested in different societies.

It would also be evident to Smith’s students that the treatment of economics was based upon psychological judgements (such as the desire for status) which are only explained in the ethics, and that this branch of Smith’s argument takes as given that particular socio-economic structure which is appropriate to the fourth economic stage, that of commerce. This kind of perspective can only be attained by examining the logical progression of ideas as outlined in the lectures on ethics, jurisprudence and economics as they unfolded in the order in which they are now known to have been delivered. Equally, the treatment of public policy in WN is transformed in its meaning when seen not merely as a development of the earlier treatment of economics but also in terms of the appropriate ethical and jurisprudential setting.

But it should also be recalled that each separate component of the system represents scientific work in the style of Newton, contributing to a greater whole which was conceived in the same image. Smith’s scientific aspirations were real, as was his consciousness of the methodological tensions which may arise in the course of such work. Such facts make it appropriate to conclude this account by reference to Smith’s awareness, and treatment, of the literature of science.

Smith’s interest in mathematics dates from his time as a student in Glasgow (Stewart, I. 7). He also appears to have maintained a general interest in the natural and biological sciences, facts which are attested by his purchases for the University Library (Scott, 1937. p. 182) and for his own collection (Mizuta, 1967). Smith’s “Letter to the Authors of the Edinburgh Review” (1756), where he warned against any undue preoccupation with Scottish literature, affords evidence of wide reading in the physical sciences, and also contains references to contemporary work in the French Encyclopédie as well as to the productions of Buffon, Daubenton and Reaumur. D.D. Raphael has argued that the letter owes much to Hume (TMS, 10, 11; cf. Bryce, EPS, 248, n. 13).

The essay on astronomy, which dates from the same period (it is known to have been written before 1758), indicates that Smith was familiar with classical as well as with more modern sources, such as Galileo, Kepler and Tycho Brahe, a salutary reminder that an 18th-century philosopher could work close to the frontiers of knowledge in a number of fields.

But Smith was also interested in science as a form of communication, arguing in the LRBL that the way in which this type of discourse is organized should reflect its purpose as well as a judgement as to the psychological characteristics of the audience to be addressed.

In a lecture delivered on 24 January 1763 Smith noted that didactic or scientific writing could have one of two aims: either to “lay down a proposition and prove this, by the different arguments that lead to that conclusion” or to deliver a system in any science. In the latter case Smith advocated what he called the Newtonian method, whereby we “lay down certain principles known or proved in the beginning, from whence we account for the several phenomena, connecting all together by the same Chain” (LRBL, ii. 133). Two points are to be noted. First, Smith makes it clear that Descartes rather than Newton was the first to use this method of exposition, even although the former was now perceived to be the author of “one of the most entertaining Romances that have ever been wrote” (LRBL, ii. 134; cf. Letter 5). Secondly, his reference to the pleasure to be derived from the “Newtonian method” (LRBL, ii. 134) draws attention to the problem of scientific motivation, a theme which was to be developed in the “Astronomy,” where Smith considered those principles “which lead and direct philosophical enquiry.”

The “Astronomy” takes as given certain results which had already been established in the lectures on language and in the Considerations; namely, that men have a capacity for acts of “arrangement or classing, or comparison, and of abstraction” (LRBL, ii. 207; cf. Corr., letter 69, dated 7 February 1763).

But the essay on astronomy approaches the matter in hand in a different way by arguing that a mind thus equipped derives a certain pleasure from the contemplation of relation, similarity or order—or as Hume would have put it, from a certain association of ideas. Smith struck a more original note in arguing that when the mind confronts a new phenomenon which does not fit into an already established classification, or where we confront an unexpected association of ideas, we feel the sentiment of surprise, and then that of wonder (Astronomy, II. 9). This is typically followed by an attempt at explanation with a view to returning the “imagination” to a state of tranquillity (Astronomy, II. 6).

Looked at in this way, the task of explanation is related to a perceived need, which can only be met if the account offered is coherent and conducted in terms which are capable of accounting for observed appearances in terms of “familiar” principles. It was Smith’s contention that the philosopher or scientist would react in the same way as the casual observer, and that nature as a whole “seems to abound with events which appear solitary and incoherent,” thus disturbing “the easy movement of the imagination” (Astronomy, II. 12). But he also observed that philosophers pursue scientific study “for its own sake, as an original pleasure or good in itself” (Astronomy, III. 3).

The bulk of the essay is concerned to illustrate the extent to which the four great systems of thought which he identified were actually able to “soothe the imagination,” these being the systems of Concentric and Eccentric Spheres, together with the theories of Copernicus and Newton. But Smith added a further dimension to the argument by seeking to expose the dynamics of the process; arguing that each thought-system was subject to a process of modification as new observations were made. Smith suggested that each system was subjected to a process of development which eventually resulted in unacceptable degrees of complexity, thus paving the way for the generation of an alternative explanation of the same phenomena, but one which was better suited to meet the needs of the imagination by offering a simpler account (Astronomy, IV. 18, 28). In Smith’s eyes, the work of Sir Isaac Newton thus marked the apparent culmination of a long historical process (Astronomy, IV. 76).

The argument as a whole also contains some radical conclusions. There is nothing in the analysis which suggests that the Newtonian (or Smithian) system embodies some final truth. At the same time, Smith seems to have given emphasis to what is now known as the problem of “subjectivity” in science in arguing that scientific thought often represents a reaction to a perceived psychological need. He also likened the pleasure to be derived from great productions of the scientific intellect to that acquired when listening to a “well composed concerto of instrumental music” (Imitative Arts, II. 30). Elsewhere he referred to a propensity, natural to all men, “to account for all appearances from as few principles as possible” (TMS, VII. ii. 2. 14) and commented further on the ease with which the “learned give up the evidence of their senses to preserve the coherence of the ideas of their imagination” (Astronomy, IV. 35). Smith also emphasized the role of the prejudices of sense and education in discussing the reception of new ideas (Astronomy, IV. 35).

He drew attention to the importance of analogy in suggesting that philosophers often attempt to explain the unusual by reference to knowledge gained in unrelated fields, noting that in some cases the analogy chosen could become not just a source of “ingenious similitude” but “the great hinge upon which everything turned” (Astronomy, II. 12).

Smith made extensive use of mechanistic analogies, derived from Newton, seeing in the universe “a great machine” wherein we may observe “means adjusted with the nicest artifice to the ends which they are intended to produce” (TMS, II. ii. 3. 5). In the same way he noted that “Human society, when we contemplate it in a certain abstract and philosophical light, appears like a great, an immense machine” (TMS, VII. ii. 1. 2), a position which leads quite naturally to a distinction between efficient and final causes (TMS, II. ii. 3. 5), which is not inconsistent with the form or Deism associated with Newton himself. It is also striking that so systematic a thinker as Smith should have extended the mechanistic analogy to systems of thought:

Systems in many respects resemble machines. A machine is a little system, created to perform, as well as to connect together, in reality, those different movements and effects which the artist has occasion for. A system is an imaginary machine invented to connect together in the fancy those different movements and effects which are already in reality performed (Astronomy, IV. 19).

Each part of Smith’s contribution is in effect an “imaginary” machine which conforms closely to his own stated rules for the organization of scientific discourse. All disclose Smith’s perception of the “beauty of a systematical arrangement of different observations connected by a few common principles” (WN, V. i. f. 25). The whole reveals much as to Smith’s drives as a thinker, and throws an important light on his own marked (subjective) preference for system, coherence and order.

Selected Works

Editions and Abbreviations. An excellent edition of the Lectures on Jurisprudence was brought out by Edwin Cannan in 1896. Cannan also prepared a valuable edition of the Wealth of Nations in 1904. J.M. Lothian edited the Lectures on Rhetoric in 1963.

Subsequent references are to the Glasgow edition of the Works and Correspondence of Adam Smith (Oxford: Clarendon Press, 1976–83) and follow the usages of that edition. The edition consists of:

I   The Theory of Moral Sentiments (TMS). Edited by D.D. Raphael and A.L. Macfie (1976).

II   An Inquiry into the Nature and Causes of the Wealth of Nations (WN). Ed. R.H. Campbell, A.S. Skinner and W.B. Todd (1976).

III   Essays on Philosophical Subjects (EPS). Ed. D.D. Raphael and A.S. Skinner (1980).

This volume includes:

  1. “The History of the Ancient Logics and Metaphysics” (Ancient Logics)
  2. “The History of the Ancient Physics” (Ancient Physics)
  3. “The History of Astronomy” (Astronomy)
  4. “Of the Affinity between Certain English and Italian Verses” (English and Italian Verses)
  5. “Of the External Senses” (External Senses)
  6. “Of the Nature of the Imitation which takes place in what are called the Imitative Arts” (Imitative Arts)
  7. “Of the Affinity between Music, Dancing and Poetry.” Items (i) to (vii), above, were prepared by W.P.D. Wightman.
  8. “Of the Affinity between Certain English and Italian Verses”
  9. Contributions to the Edinburgh Review (1755–6): (a) Review of Johnson’s Dictionary; (b) A Letter to the Authors of the Edinburgh Review (Letter).
  10. Preface to William Hamilton’s Poems on General Occasions. Items (viii) to (x), above, were prepared by J.C. Bryce.
  11. Dugald Stewart, “Account of the Life and Writings of Adam Smith LL.D.” (Stewart)

Edited by I.S. Ross.

IV   Lectures on Rhetoric and Belles Lettres (LRBL). Edited by J.C. Bryce; general editor, A.S. Skinner (1983).

This volume includes:

“Considerations Concerning the First Formation of Languages” (Considerations)

V   Lectures on Jurisprudence (LJ)

Edited by R.L. Meek, P.G. Stein and D.D. Raphael (1978). This volume includes:

  1. Student notes for the session 1762–3 (LJA)
  2. Student notes for the session 1763–4 but dated 1766 (LJB)
  3. The “Early Draft” of the Wealth of Nations (ED)
  4. Two Fragments on the Division of Labour (FA) and (FB)

VI   Correspondence of Adam Smith (Corr.). Edited by E.C. Mossner and I.S. Ross (1977). This volume includes:

  1. “A Letter from Governor Pownall to Adam Smith (1776)”
  2. “Smith’s Thoughts on the State of the Contest with America, February 1778.” Edited by D. Stevens.
  3. Jeremy Bentham’s “Letters” to Adam [S]mith (1787, 1790).

Associated volume

Essays on Adam Smith (EAS). Edited by A.S. Skinner and T. Wilson (1975).

References to Corr. Give letter number and date. References to LJ and LRBL give volume and page number from the MS. All other references provide section, chapter and paragraph number in order to facilitate the use of different editions. For example: Astronomy, II. 4 = “History of Astronomy,” section II, para. 4; Stewart, I. 12 = Dugald Stewart, “Account,” section I, para. 12; TMS, I. i. 5. 5 = TMS, Part I, section i, chapter 5, para. 5; WN, V. i. f. 26 = WN, Book V, chapter i, section 6, para. 26.


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